■^ 


THE  LIBRARY 

OF 

THE  UNIVERSITY 

OF  CALIFORNIA 

LOS  ANGELES 

SCHOOL  OF  LAW 


FLINT  & 
1232  Row- 


A    TREATISE 


ON  THE  LAW  OF 


FIDELITY    BONDS 


WITH   SPECIAL  REFERENCE  TO 


Corporate  Fidelity  Bonds 


-BY- 


M.  BARRATT  WALKER,  LL.B. 
Of  the  Baltimore  Bar 


King  Brothers 
Law  Publishers 
Baltimore,  Md. 

i9oa 


Copyright,  1909, 

by 

M.   BAKKATT  WALKER. 


^ 
^ 

^ 

^ 


PREFACE. 

It  is  perhaps  imnecessarj  to  say  that  this  work  is  not  in- 
tended to  be  a  comprehensive  treatise  on  the  general  law  of 
guaranty  insurance.  It  undertakes  to  group,  in  readily  work- 
able form,  all  the  cases  relating  to  corporate  fidelity  bonds, 
and  to  give  the  decisions  in  the  most  concise  manner  possible. 
Most  of  the  text  is  in  the  words  of  the  law,  as  pronounced  by 
its  authoritative  tribunals,  and  very  little  in  dedtictions  or 
opinions  by  the  author.  It  is  confidently  believed  that  herein 
will  be  found,  without  further  search  or  reference  to  any 
other  work,  all  the  necessary  authorities  to  determine  the 
question  of  liability,  prepare  the  brief,  or  try  nine  out  of 
every  ten  fidelity  bond  cases.  If  it  shall  accomplish  this  re- 
sult, there  is  reason  for  its  existence.  Much  of  the  material 
used  was  originally  prepared  in  the  actual  investigation  and 
briefing  of  fidelity  bond  cases;  all  was  written  ''on  the  tiring 
line"  so  to  speak,  of  business  activity,  and  with  the  experi- 
ence thereby  gained. 

The  work  is  submitted  to  the  profession  in  the  belief  that 
it  will  be  welcome  in  these  modem  days  of  law  specialization, 
as  an  authoritative  guide  in  this  branch  of  the  law,  and  that 
it  will  prove  at  least  a  small  credit  upon  that  debt  which,  ac- 
cording to  Lord  Bacon  every  man  owes  to  his  profession. 

M.  Barratt  Walker, 

Baltimore,  Md., 
January  1,  1909. 


TABLE  OF  CONTENTS* 

CHAPTER  I. 

Construction  of  Corporate  Fidelity  Bonds. 

SECTION 

1.  Business  of  Corporate  Fidelity  Suretystiip. 

2.  Theories  of  Construction. 

3.  Same — General  Rules — Element  of  Compensation. 

3a.  Same — Strict  Construction  according  to  terms  of  contract. 

4.  Same — Doctrine  as  established  by  Supreme  Court. 

5.  Same — Leading  case. 

6.  Same — Further  authorities. 

7.  Same — Construed  as  insurance  policies. 

8.  Same — Authorities. 

9.  Treated    as    Insurance    Contracts    and    hence    construed    most 

favorably  to  insured. 

10.  Leading  case. 

11.  Additional  authorities. 

12.  Limitations  on  the  rule. 

13.  Where  contract  prepared  by  insured — American  Bankers'  Asso- 

ciation Form. 

14.  Same — Discussion. 

15.  Third  theory  of  Construction — As  Indemnifying  Contracts. 

16.  Same — Illustration. 

17.  Same — Further  illustration. 

18.  Same — Further  illustrations  continued. 

19.  Same — Recent  important  illustration  of  construction  as  indem- 

nifying contract  regardless  of  terms. 

20.  Same — Opposite  holding  hi  more  recent  case. 

21.  Summary. 

22.  Construction  of  .Judicial  Bonds. 

23.  Construction  of  contract  and  other  similar  bonds  by   compen- 

sated corporate  surety. 


VI  TABLE  OF  CONTENTS. 

CIIAPTKi:    II. 
Kkpuesentations  and   Wakkanties. 

SEcrrioN 
24.     Till'  subject  of  iiun-h  eonlli<t   iiiid  (lilliculty. 

DFFlNrnONS. 

'2r>.  Anioiild's  doliiiitlou. 

20.  May's  (Iffniitioii. 

27.  Kerr's  doflnition. 

28.  Elliott's  dellnition. 

2!>.     I^eductlons  from  the  authorities. 
.•?(•.     Kills'  definition, 
.'il.     LeadniLT  ca-se. 

32.     Burden  of  proof  of  Representation  or  Warranty  in  corporate 
fidelity  contract. 

BULES    OF    CONSTBUCTION. 

3o      False  representation. 

34.  Employer's   statement    regarding    condition    of   employee's   ac- 

counts. 
3r».     Illustration. 

30.     Further  reference  to  statements  as  to  examination  of  accounts. 
37.     False  warranty. 

35.  Leading  case. 

30.  r.reach  of  promissory  warrant. 

40.  The  law  averse  to  forfeitures. 

41.  Doubtful  statements  construed  as  representations. 

42.  The  Court  views  the  entire  contract. 

43.  False  statements  by  risk  not  binding  on  insured  unless  ratified. 

EXAMPLES    OF   REPRESENTATIONS    AND    WARRANTIES. 

44.  Digest  of  authorities. 
4.5.     Same. 

40.  Same. 
47.  Same. 
4.S.     Same. 


TABLE  OF  CONTENTS.  Vll 

SECTION 

49.  Same. 

50.  Same. 

51.  Same. 

52.  Same. 

53.  .  Authority  of  oflicer  of  corporation  in  making  application  for 

fidelity  bond  of  employee  thereof. 

54.  Further  reference  to  same  subject. 

55.  Representations  and  warranties  in  insurance  policies. 
5t).     Statements  by  public  officers. 


CHAPTER   III. 

Featjd  in  Procuring  Bond. 

57.  Effect  on  liability  of  surety  of  non-disclosure  upon  proper  in- 
quiry or  opportunity  or  fraudulent  concealment  or  misrep- 
resentation of  material  faots  by  obligee  at  the  time  of  or 
previous  to  the  execution  of  the  bond. 

5S.     Fraudulent  or  negligent  acts  of  obligee. 

59.  Leading  cases  on  fraudulent  representation. 

60.  Further  references. 

61.  Leading  cases  on  negligenre  by  obligee. 

62.  Digest  of  authorities. 

63.  Same. 

64.  Same. 

65.  Same. 

66.  Rule  inapplicable  to  Govonimpnt  or  other  sovereign  body. 

67.  Further  references. 
6S.     Private  corporations. 


CHAPTER  IV. 

Laches  or  Indulgence  by  Obligee. 

6n.     Effect  of,  after  execution  of  bond. 

70.     Effect  of  the  failure  of  the  obligee  to  notify  the  surety  of  the 
delinquency  of  tlir  prin<i])al — Digest  of  antlinrifies. 


VIII  lAKI.K   OK   CONTENTS. 

b  ten  ON 
71.     SniiK'. 

T'J.      KiiU'  of  uiKid   r.-iilli  I  mil  iiiiiuiis. 
T."{.      liliibllity  of  llic  smcl.v    Inr  (IflMiills  i>l'  llic  |»riii<i])iil   (•(Muiiiittf.-il 

after  knowlt'd;;^  h\    Hit-  ol)li;,'t'('  of  juior  dofjiiilt    not  ciiiii 

uiunicalod  to  tlic  i.urct.v. 

74.  Digest  of  aiilliDiil  ifs. 
7r>.     Same. 

7(».  lOn'ect  of  (lenliii^'s  witli  oi  iiiiliil;r<'iiie  to  tlie  principal  by  the 
obligee  without  the  know  li-du'e  and  consent  of  the  surety — 
Digest  of  authorities. 

77.     Same. 

I.ACIIKS  on   NKGLIGKNCK  OF  THE  OBLIQEE  GENERALLY. 

75.  (a)   I'nited    States   Government. 

71».  Digest  of  authorities,  illustrative  of  rule. 

80.  Same. 

81.  (6)   State,  municipal  and  other  public  corporations. 

82.  Digest  of  .•luthorities. 
SO.  Same. 

84.  Same. 

85.  Same — Against  the  rule. 

86.  (c)   Private    corporations. 

87.  Leading  case. 

88.  Same — Discussion. 

89.  Leading  case  supported  by  following  authorities. 

90.  Same. 

91.  Authorities  against  rule  as  adopted  in  ShaefiEer  Case. 


CHAPTER   V. 

FR.iin)   oi!    DisnoxESiY — Larceny   or   Embezzlement. 

92.  Meaning  of  terms. 

93.  Illustration. 

94  Strict  proof  as  in  criminal  case  not  necessary  in  civil  action. 

95  Digest  of  authorities. 
9(1.     Same. 


TABLE  OF  COI^TENTS.  IX 

SECTION 
97.     Same. 

9S.     Crimes  by  National  Bank  ollicer.s. 

99.     Terms  coustrued  substantially   as   wrongful   misapplication   of 
funds. 


CHAPTER  VI. 

Extent  of  Corporate   Surety's   Liability  on   Successive   Fidelity 

Bonds  Where  Defaults  Occurred  During  More  Than 

One  Term  and  Exceed  Penalty  of  Original  Bond. 

100      Liability  of  surety  limited  to  penalty  of  original  bond. 

101.  Leading  case. 

101a.  Further  authorities  in  support  of  rule  as  here  stated. 

102.  Conflict — Surety  liable  on  more  than  one  bond. 

103.  Same. 

104.  Liability  where  original  bond  invalid. 


CHAPTER  VII. 

Liability  of  Surety  Upon  Corporate  Fidelity  Bond  Filed  as  the 
Official  Bond  of  a  Public  Offices. 

105.  Surety  liable  as  upon  statutory  bond. 

106.  False  inducement  will  not  relieve  surety. 

107.  Holding  that  surety  only  liable  in  accordance  with  his  contract. 


CHAPTER  VIII. 
Culpable  Negligence. 


108.     Elastic  term  in  insurance. 
111.     Illustrations. 


X  TABLE  OF  CONTENTS. 

niArTKR    IX. 
KFKKcr  ON  Subkty's  LiAHii.nv  Id   Ills  IlKQUiBiNo  Without  Denial  ok 

LlAIULlTY     FUUTIIKB    ACTION     BY     OBLIGEE     IN     PERFECTING     PBOOKH 

OK  Loss.  Making  Information  kok  Akkkst  ou  the  Like; 

OB  IN  Himself  Making  Settlement  With  ou 

Securing  Pbosecution  of  Risk. 

SECTION 

110.  Surety   must  not  iiulitate   acceptance  of  liability,   take  or   re- 

i|iilre  further  action,  and  then  repudiate. 

111.  Illu.slratioiis. 


CHAPTER  X. 

APPLIC  VTION    OF    S.\LVAGE. 

11?.     Applied  first  to  reduction  of  unsecured  loss. 

113.  Digest  of  authorities. 

114.  Discussion  of  manner  of  application. 


CHAPTER  XI. 
Application  of  Payments. 


lin.  In  course  of  business. 
lICi.  Di.i:est  of  authorities. 
117.     Same. 


CHAPTER  XII. 


Immediate  Notice. 


lis.     What  constitutes  immediate  notice — Supreme  Court   rule. 

119.  Reasonable  notice  sufficient. 

120.  Dleest  of  authorities. 


TABLE  OF  CONTENTS.  xi 

SECTION 

121.  Same. 

122.  Same. 

32?..     Notice  under  accideut  policy. 

124.     Requirement  of  notice  reasonable  and  imperative. 


CHAPTER  XIII. 
Peoof  of  Loss. 


125.  Sufficiency  of. 

126.  Digest  of  authorities. 

127.  Same. 


CHAPTER  XIV. 

Change  of  Employment  or  Alteration   of  Contract. 

12S.  Effect  on  liability  of  surety  of  uncommuuicated  change  of  em- 
ployment or  alteration  of  contract  between  principal  and 
obligee. 

129.  Risk  performing  duties  of  more  than  one  office. 

130.  Effect  of  change  in  contract  or  duties  of  agent. 

131.  Extension  of  charter  of  obligee  or  increase  of  capital  stock. 

132.  Change  in  partnership  of  risk. 

133.  Change  of  partnership  of  obligee. 

134.  Miscellaneous  cases. 


CHAPTER  XV. 

Faithful  Performance  of  Duty. 

135.  Embraces  competency,  skill  and  diligence,  as  well  as  integrity. 

136.  Miscellaneous  cases. 

137.  Same. 


XI 1  TABLE  OF  CONTENTS. 

CHAPTER  XVI. 

Tebm  of  Office. 

SECTION 

13S.  Attathiiicut  and  tonniiuitiou  of  liability. 

i;{!»  IHgost  of  authorities. 

14U.  Same. 

141.  Same. 

142.  Same. 

143.  Same. 

144.  Same. 

145.  Bonds  of  public  officers. 
14G.  Same. 


CHAPTER  XVII. 
Successive  Bonds. 


147.     Digest  of  authorities. 
1-lS.     Official  bonds. 
149.     Same. 


CHAPTER  XYIII. 

Signature  of  Principal. 

150.  Necessary  where  so  stipulated  in  the  contract. 

151.  Leading   case. 

152.  Leading  case,  continued. 

153.  Recent  decisions. 

154.  Reference  to  fidelity  bonds  generally — Cases  in  conflict. 

155.  Rules  as  established  in  several  States. 

156.  Miscellaneous  illustrations. 


TABLE  OF  CONTENTS.  Xlll 

SECTION 

157.     Digest   of    authorities    relative   to   bouds   otlier   tliau   fidelity — 

Surety  liable. 
15S.     Same — Surety  not  liable. 
15i).     Miscellaneous  observations. 


CHAPTER  XIX. 

What  Constitutes  "Knowledge"  of  Default. 

160.  Obligee  required  to  act  on  actual  knowledge,  not  mere  sus- 
picion. 

103.     Digest  of  authorities. 

161a.  Knowledge  of  unfavorable  facts  not  connected  with  employ- 
ment. 


CHAPTER  XX. 

Knowledge  of  Officer  of  Corporation. 

102.     Corporation  ordinarily  bound  by  knowledge  of  managing  officers. 

163.  Cases  holding  corporation  bound   by  knowledge  of  managing 

agent. 

164.  Cases  holding  corporation  not  bound  by  knowledge  of  manag- 

ing agent. 


CHAPTER  XXI. 
Bank  Employee. 

165.  Digest  of  authorities. 

166.  Same. 

167.  Same. 

168.  List  of  cases  relative  to  bank  employees. 


XIV  TAliLK  OF  CONTENTS. 

CIlArT);K  XXII. 
Bonds  of  Iinhukanck  Agents. 

SECTION 

lt'.!i.      Iiiiportaiil  case — Discus.siou. 

170.  l)i;;i'st  of  authorities. 

171.  Table  of  cases  on  bonds  of  insiuaiKc  a}j;ents. 


CHAPTER  XXIII. 
Limitations. 

172.  Provisions  relative  thereto  in  corporate  fidelity  bonds 

173.  Doctrine  of  Supreme  Court. 

174.  Digest  of  authorities. 

175.  Same. 
17G.  Same. 


CHAPTER  XXIV. 
Cashiee  as  Agent  of  Bank. 

177  Ordinarily  acts  and  statements  binding  on  bank. 

17S.  Cases  in  which  bank  not  bound  by  acts  of  cashier. 

179.  Cases  holding  otherwise. 

150.  Pnymontof  premiums  important  element  in  determining  whether 

bank  bound  by  acts  of  cashier, 

151.  List  of  cases. 


TABLE  OF  CONTENTS.  XV 

CHAPTER  XXV. 
Evidence. 

SECTION 

182.  Admissions  of  principal  and.  records  Icept  by  him  usually  admis- 

sible and  binding  on  surety. 

183.  Digest  of  authorities. 

184.  Burden  of  proof. 


CHAPTER  XXVI. 

Scope  of  Liability. 

185.  Miscellaneous  illustrations  of  cases  held  to  establish  liability  ou 

fidelity  bonds  and  eases  holding  otherwise. 

186.  Same. 

187.  Same. 
ISS.     Same. 


CHAPTER  XXVII. 
Removal  of  Causes. 

189.  From  State  to  Federal  Court — Requisites. 

190.  Discussion  of  necessary  facts  to  permit  removal. 
19J.     Digest  of  authorities. 

192  Removal  on  account  of  prejudice  or  local  influence. 

193.  State  statutes  prohibiting  removal. 

194.  Same — Review  of  authorities. 

195.  Same — Same. 

196.  Same — Same. 

197.  Same — Same. 

198.  Discussion  of  constitutionality  of  such  statutes. 

109.     Is  cause  removable  whore  Federal  question  involved? 
2f^0.     Possible  solution  of  question  of  conflict  between  States  and  Fed- 
eral Government. 


THE  LAW  OF  FIDELITY  BONDS. 


CHAPTER  L 


CONSTRUCTION    OF    CORPORATE    FIDELITY    BONDS. 


1. 

Business  of  Corporate  Fidel- 

14. 

ity  Suretyship. 

15 

>) 

Theories   of   Construction. 

3. 

Same — General    Rules — Ele- 

ment of  Compensation. 

10. 

3a 

.  KSame  — ■  Strict    Construction 

17 

according  to  terms  of  con- 

18. 

tract. 

4. 

Same — Doctrine     as     estab- 
lished by  Supreme  Court. 

19. 

5. 

Same — Leading   case. 

G. 

Same — Further  authorities. 

7. 

Same — Consti-ued    as    insur- 
ance policies. 

20 

8. 

Same — Authorities. 

21 

9. 

Treated    as    Insurance    Con- 
tracts    and     hence     con- 

22 

strued  most  favorably  to 

23 

insured. 

10. 

Leading  case. 

11. 

Additional  authorities. 

12. 

Limitations  on  the  rule. 

13. 

Where  contract  prepared  by 
insured — American    Banli- 
ers'  Association  Form. 

Same — Discussion. 

Third  theory  of  Construc- 
tion —  As  Indemnifying 
Contracts. 

Same — Illustration. 

Same — Further    illustration. 

Same — Further  illustrations 
continued. 

Same — Recent  important  il- 
lustration of  construction 
as  indemnifying  contract 
regardless  of  terms. 

Same — Opposite  holding  in 
more  recent  case. 

Summary. 

.Judicial  Bonds,  construction 
of. 

Construction  of  contract 
and  other  similar  bonds 
by  compensated  corporate 
surety. 


I. — Business  of  Corporate  Fidelity  Suretyship. 

The  business  of  writing'  tidt'lity  bonds,  iiuaranteeing  em- 
ployers aiiainst  loss  by  dishonesty  of  employees,  by  corpora- 
tions, incor])orated  and  compensated  for  the  purpose,  is  of 
recent  development. 


2  1111,    LAW    ol'     JIDKl.nV     IJOMJS. 

Must  ol  llic  decisions  jj;i'ovving  out  (jf  litigation  on  tin* 
sul))('ct  have  Itccn  rcndcrt'd  within  the  j)ast  ten  years,  and  it 
has  not  vet  Ixcn  fully  determined  what  position  contracts  of 
this  character  shall  occupy  in  the  law. 

Such  contracts  are  usiudly  executed  upon  printed  forms, 
prepared  by  the  companies,  all  companies  using  substantially 
the  same  forms,  containing  the  terms  of  liability,  and  many 
conditions  and  restrictions  thereupon,  and  predicated  upon 
written  a])])lications,  which  are  reforrofl  to  in  and  made  the 
basis  of  the  contract. 

Since  such  contracts  were  tirst  iirought  before  the  courts 
for  interpretation  there  has  been  almost  irreconcilable  conflict 
in  the  decisions.  Substantially  three  theories  of  construction 
have  been  advanced. 

2. — Theories  of  Construction. 

Firsl.  That  while  corj)orations  engaged  in  this  business 
cannot  claim  the  ben ( tit  of  the  doctrine  that  they  are  "favor- 
ites of  the  law,"  under  the  rule  applicable  to  individual  un- 
compensated sureties  on  common  law  obligations,  they  are  to 
be  treated  as  sureties,  and  as  such,  to  have  the  right  to  stand 
upon  the  precise  terms  of  their  obligations  deliberately  and 
solenmly  made,  which  cannot  be  extended  by  implication  be- 
yond such  terms ;  that  they  arc  bound  only  to  the  extent,  and 
in  the  manner,  and  under  the  circumstances,  pointed  out  in 
said  obligations. 

Second.  That  the  business  of  issuing  corporate  fidelity 
bonds,  for  compensation,  is  but  a  form  of  insurance,  and  the 
contracts  so  issued,  while  denominated  ''bonds,"  are  aiudogous 
to  insurance  policies,  and  subject  to  the  law  applicable  thereto. 

Third.  That  such  contracts  are  in  the  nature  of  indemnify- 
ing bonds,  to  be  liberally  construed  in  favor  of  effecting  the 
purpose  for  which  given,  and  with  little  regard  to  the  provi- 
sions and  conditions  contained  therein. 


COKSTBUCTIOJf     or    CORPORATE    FIDELITY    BONDS.  6 

3. — Same — General  Rules — Element  of  Compensation. 

Prof.  Childs,  in  his  recent  work  on  Suretyship  and  Guar- 
anty (sec.  91),  referring  to  the  construction  of  suretyship 
obligations,  says : 

"The  construction  should  be  reasonable,  and  should  not 
be  affected  by  the  fact  that  the  surety  receives  compensation 
as  an  inducement  to  enter  into  the  contract,  or  that  the 
making  of  such  contracts  is  a  matter  of  business.  While  it 
is  true  that  a  contract  of  suretyship,  entered  into  by  a  cor- 
poration formed  for  the  very  purpose,  receives  a  somewhat 
different  construction  from  that  of  a  private  surety,  this 
results  from  the  fact  that  the  corporate  surety  itself  pre- 
pares the  contract  "with  great  care,  looking  entirely  to  its 
own  interests,  thus  bringing  in  rules  of  construction  which 
would  not  enter  into  a  contract  signed  by  a  private  surety, 
who  frequently  signs  a  contract  prepared  by  the  creditor  or 
obligee,  and  sometimes  without  even  reading  it." 

Brandt  (Sur.  (t  Guar.  sees.  1,  2  and  5)  states  the  following 
conclusions : 

"Where  the  contract  as  embodied  in  the  original  fidelity 
bond  of  a  corporate  surety  partakes  somewhat  of  the  nature 
of  a  contract  of  suretyship,  of  one  of  guaranty  aud  of  one 
of  indemnity,  it  is  more  properly  classed  under  the  latter 
term.  As  it  is.  more  strictly  speaking,  an  agreement  to  in- 
demnify the  obligee  against  loss  occurring  through  defaults 
of  the  employee.  The  employee  does  not  join  in  such  bonds 
for  the  purpose  of  binding  himself  to  the  employer,  but 
solely  for  the  purpose  of  obligating  himself  to  the  indem- 
nitor. The  great  weight  of  authority  holds  that  such  con- 
tracts are  not  strict  contracts  of  suretyship ;  tlie  surety  is 
not  a  favorite  of  the  law,  but  such  contracts  are  to  be  con- 
strued in  the  nature  of  policies  of  insurance,  the  compen- 
sated corporate  surety  occupying  an  entirely  different  posi- 
tion from  that  of  the  former  non-compensated  individual 
surety.    The  contracts  are  not  strictly  one  of  guaranty,  be- 


i  TllK    J. AW     ()l-     !■  lltKl.rrV     I50.NJJS. 

cause   tlioy   require   im   notice   of  acfcptance  and    (]ilTer   in 
every  essential." 

In  note  to  98  Am.  State  ]{e]).  840,  the  author  says: 

"Where  surety  companies,  acting  for  a  stipulated  com- 
jK'usation,  have  gone  upon  the  bonds  of  individuals  or  pub- 
lic officers,  the  Courts  have  stated  with  approval  the  rule 
of  construction  relating  to  ordinary  sureties,  and  have  not 
attempted  to  distinguish  between  where  entered  into  gra- 
tuitously and  where  for  a  valuable  consideration." 

Generally,   all  instruments   of  suretyship   are  construed 
strictly  as  mere  matters  of  legal  right.     The  rule  is  other- 
Avise  where  they  are  founded  on  a  valuable  consideration. 
Mauran  vs.  BuUus,  16  Pet.  528. 

The  doctrine  that  a  surety  is  a  favorite  of  the  law,  and 
that  the  contract  must  be  strictly  construed  as  to  him,  does 
not  apply  to  cases  where  the  surety  received  compensation, 
and  the  suretyship  is  in  line  of  his  regular  business. 
Walker  vs.  Holtzclaw,  57  S.  C.  459. 

A  compensated  surety  can  only  insist  upon  forfeiture 
clauses  where  the  failure  to  comply  therewith  probably  in- 
flicts a  loss  on  the  surety. 

HefFerman  vs.  United  States   Fidelity  <&:  Guaranty 
Co.,  37  Wash.  477. 

3a. — Same — Strict  Construction   According  to  Terms  of  Contract. 

Sup]iort  of  the  first  theory  of  construction  stated  above  is 
found  in  the  many  cases  referreil  to  in  the  following  Chapters, 
and  unnecessary  to  mention  here,  where  the  courts  have  given 
effect  to  the  exact  terms  used  in  the  contract  under  considera- 
tion. 


CONSTRUCTION    OF    CORPORATE    TIDELITY    BONDS.  O 

Said  a  distinguished  judge: 

"He  who  would  charge  a  surety  for  his  principal's  breach 
of  contractual  duty  must  travel  without  deviation  the  way 
pointed  out  in  the  contract,  however  iron-bound  it  may  be, 
for  there  is  for  the  surety,  in  the  enforcement  of  his  bond, 
no  equity  nor  latitude  beyond  its  strict  terms." 
Swift  ifr  Co.  vs.  Jones,  135  Fed.  437. 

It  is  too  well  settled  to  need  the  citation  of  authorities  to 
establish  the  proposition  that  sureties  are  ordinarily  regard- 
ed as  favorites  of  the  law,  and  are  not  bound  beyond  the 
strict  terms  of  their  contracts. 
98  Am.  St.  Eep.  844. 
25  W.  Va.  45. 

It  is  well  settled  that  parties  to  a  contract  have  a  right  to 
insert  any  lawful  statement  and  conditions  that  they  may 
mutually  agree  upon,  and  which  may  be  deemed  necessary 
to  protect  their  interests.  The  Courts  may  not  arbitrarily 
disregard  such  conditions  when  unmistakably  and  deliber- 
ately entered  into  between  the  parties. 

Dwight  vs.  Germania  Life  Ins.  Co.,  103  N".  Y.  341. 
Wieder  vs.  Union  Surety  &  Guaranty  Co.,  86  I^.  Y. 
Supp.  105. 

A  surety  has  the  right  always  to  impose  any  limit  he 
choose  to  his  liability. 

Benjamin  vs.  Rogers,  126  N.  Y.  60. 

It  has  been  held  that  the  condition  of  an  omplovee's  fidelity 
bond  must  bo  strictly  complied  with  by  the  obligee  before  the 
obligor  can  be  charged,  and  that  a  declaration  that  does  not 
aver  coni]dian('o  with  cniKlitiinis  prcccdcnl  lo  recovery  is  bad 
on  (lemuri'er. 

Cal.   Savings   Bank  vs.    American   Sni-ety   Com- 
pany, 82  Fed.  866. 


6  'IIIK    LAW    OK    I-IDKMIY     IJONDS. 

4. — Same — Doctrine  as  Established  by  Supreme  Court. 

The  Siipniiio  C\>iirt  of  the  United  States  says: 

"Contracts  of  insiiranco  arc  contracts  of  indemnity  upon 
the  terms  and  conditions  specified  in  the  policy  embodying 
the  agreement  of  the  parties.  For  a  comparatively  small 
consideration,  the  insurer  undertakes  to  guaranty  the  in- 
sured against  loss  or  damage,  upon  the  terms  and  conditions 
agreed  upon,  and  no  other;  the  insurer,  therefore,  may 
justly  insist  upon  the  fulfillment  of  these  terms.  If  the 
insured  cannot  bring  himself  within  the  conditions  of  the 
policy,  he  is  not  entitled  to  recover  for  the  loss.  The  terms 
of  the  policy  constitute  the  measure  of  the  insurer's  liabil- 
ity, and,  in  order  to  recover,  the  assured  must  show  himself 
within  these  terms;  and  if  it  appears  that  the  contract  has 
been  terminated  by  the  violation  on  the  part  of  the  assured 
of  its  conditions,  then  there  can  be  no  right  to  recover.  The 
compliance  of  the  assured  with  the  terms  of  the  contract  is 
a  condition  precedent  to  the  right  of  recovery.  If  the  as- 
sured has  violated  or  failed  to  perform  the  conditions  of 
the  contract  and  such  a  violation  or  want  of  performance 
has  not  been  waived  by  the  insurer,  then  the  assured  cannot 
recover.  It  is  immaterial  to  consider  the  reasons  for  the 
conditions  or  provisions  on  which  the  contract  is  made  to 
terminate,  or  any  other  provision  of  the  policy  which  has 
been  accepted  or  agreed  upon.  It  is  enough  that  the  parties 
have  made  certain  terms  conditions  on  which  their  con- 
tract shall  continue  or  terminate.  The  courts  may  not 
make  a  contract  for  the  parties.  Their  function  and  duty 
consist  simply  in  enforcing  and  carrying  out  the  one  actu- 
ally made." 

Imperial  Fire  Ins.  Co.  vs.  Co'os  Co..  151  U.  S.  462. 

5. — Same — Leading  Case. 

The  language  of  the  Supreme  Judicial  Court  of  Massachu- 
setts, in  the  leading  case  of  Campbell  vs.  Ins.  Co.,  98  Mass. 


CONSTRUCTION     OF    CORPORATE    FIDELITY    BONDS,  i 

381,  referring  to  a  contract  of  life  insurance,  is  equally  ap- 
plicable in  this  connection  to  corporate  iidelity  bonds. 

"Whether  a  form  containing  so  many  and  so  minute 
questions  as  this  application  does  is  suitable  to  be  used  by 
insurei's  of  lives,  or  safely  to  be  adopted  by  those  applying 
for  such  insurance,  is  a  question  which  the  parties  must 
determine  for  themselves  before  completing  their  contract. 
When  this  has  been  once  completed,  the  words  used  must 
receive  their  legal  interpretation  and  effect." 

6. — Same — Further  Authorities. 

"In  attempting  to  construe  a  bond  so  as  to  arrive  at  the 
intention  of  the  parties  thereto,  the  Court  should  put  itself 
in  an  attitude  to  view  the  contract  from  the  same  stand- 
point from  which  it  was  seen  when  they  entered  into  it. 

J^orth  St.  Louis  Bldg.  &  Loan  Ass'n,  vs.  Obert,  169 
Mo   507. 

The  bond  and  the  employer's  declaration  Avhich  preceded 
it  must  be  read  together. 

Eice  vs.  Fidelity  &  Deposit  Co.,  103  Fed.  427. 
Phoenix  Ins.  Co.  vs.  Guarantee  Co.,  115  Fed.  964. 

The  same  rules  are  to  be  applied  in  ascertaining  the 
meaning  of  the  contract  of  a  surety,  which  are  used  in 
ascertaining  the  meaning  of  any  other  contract,  although 
Avhen  the  intention  of  the  parties  has  been  arrived  at  by  the 
use  of  those  rules,  the  liability  of  the  surety  should  not  be 
enlarged  or  extended  by  implication  or  construction. 

McCormick  Harvesting  Machine  Co.  vs.  Laster,  70 
111.  App.  425. 

"There  is  too  iiiucli  tcii(lciicv  on  tlic  part  dt"  judges  to  con- 
strue away  valid  provisions  in  contracts  of  insurance  and 
indemnity,  and  thus  roach  some  more  equitable  conclusion. 


o  rill';  LAW  ()!•■  i'ii)i;i,ri'v   uo.xds. 

Tho   rosult   is   much   'hanl-casc'   l;i\v,   wliicli    is   mostly   had 
law,  and  always  variable  law." 

Judge  Pardee,  in  dissenting  o])iiiii)ii   in  .liicksoii  vs. 
Fidelity  &  Casualty  Co.,  75  Fed.  :i'>U. 

A  distincTiishcd  .Indite  said  in  regard  to  setting  aside 
salvage  contracts  on  slight  grounds: 

"If  a  solemn  contract,  made  under  the  most  serious  cir- 
cumstances, like  the  one  under  consideration,  could  be  repu- 
diated at  pleasure  by  one  of  the  parties  to  it,  on  such  a 
.  ground  as  that  insisted  upon  here,  no  contract  could  be 
relied  upon  as  binding,  and  all  the  law  of  contracts,  affect- 
ing so  largely  the  affairs  of  mankind  as  that  law  does,  would 
have  to  be  treated  as  an  idle  jargon." 

Jackson  vs.  Fidelity  &•  Casualty  Co.,  75  Fed.  359. 

7. — Same — Construed  as  Insurance  Policies. 

Unquestionaltly  the  second  theon^  of  construction  here 
shown,  to  M'it,  that  corporate  fidelity  bonds  are  to  be  treated 
as  in  the  nature  of  insurance  policies  and  so  construed  is  sup- 
ported by  the  weight  of  authority,  and  that  such  construc- 
tion will  eventually  prevail  is  certain. 

8. — Same — Authorities. 

That  an  agreement  of  this  kind  is  a  contract  of  insurance, 
and  not  merely  one  of  suretyshiii,  ;ind  is  to  be  interpreted 
accordingly,  is  settled  beyond  any  peradventure. 

Note  to  Am.  Cred.  Ind.  Co.  vs.  Wood,  19  C.  C.  A. 
273. 

The  late  Chief  Judge  McSherry.  of  the  ^larvland  Court 
of  A])peals,  has  admirably  stated  the  law  ap]ilicable  to  the 
theory  here  referred  to. 


CONSTKUCTIOiSr    OF    COErOEATE    FIDELITY    BOXDS.  9 

He  said : 

"Contracts  of  this  character,  like  policies  of  fire  insur- 
ance, to  which  they  are  closely  analogous,  though  with 
which  they  are  not  strictly  identical,  must  receive  a  rea- 
sonable construction  so  as  to  give  effect  to  the  intention  of 
the  parties  thereto,  and  so  as  to  carry  out,  rather  than  to 
defeat,  the  purposes  for  which  they  were  executed.  •  They 
should  neither,  on  the  one  hand,  be  so  narrowly  or  tech- 
nically interpreted  as  to  frustrate  their  obvious  design,  nor 
on  the  other  hand,  so  loosely  or  inartificially  as  to  relieve 
the  obligor  from  a  liability  fairly  within  the  scope  or  spirit 
of  their  terms." 

Union  Central  Life  Ins.  Co.  vs.  United  States  Fidel- 
delity  and  Guaranty  Co.,  99  Md.  423. 

Where  the  contract  appears  to  have  been  drawn  by  the 
surety  company  with  an  elaborate  list  of  questions  to  be  an- 
swered by  the  obligee,  the  answers  to  which  are  by  the 
terms  of  the  contract  to  be  treated  as  warranties  of  the 
truthfulness  of  the  statements  therein  made,  and  where  the 
company's  contract  amounts  to  an  agreement  between  it 
and  the  obligee,  to  indemnify  the  obligee  against  loss  aris- 
ing from  a  certain  specified  source — for  instance,  defalca- 
tion by  an  employee,  it  is  treated  as  an  insurance  policy  and 
construed  according  to  the  rules  of  construction  applicable 
to  insurance  policies. 

Brandt.  Sur.  (S:  Guar.,  section  15. 

Taft,  Circuit  Judge,  said  with  reference  to  a  credit  in- 
demnity contract : 

"These  contracts  of  indemnity  are  merely  contracts  of 
insurance,  carefully  framed,  to  limit  as  narrowly  as  possi- 
ble the  liability  of  the  insurer,  and  doubtful  expressions  in 
them  are  to  be  construed  favorably  to  the  insured." 

Am.  Cred.  Tnd.  Co.  vs.  Athens  "Woolen  Mills,  02 
Fed.  581,  34  C.  C.  A.  161  (Circuit  Court  of 
Appeals,  Sixth  Circuit,  1899). 


1(1  TlIK    l.AW    OK    I'lDKI.nV     liONlJS. 

Ill  the  constnicfioii  of  such  a  contract,  cases  h<jl(]irig  that 
a  suic'ty  is  a  I'aMdiic  of  the  law,  and  that  a  chiiiu  against 
them  is  a  strictissimi  juris  have  no  application.  Such  con- 
tracts are  in  fact  policies  of  insurance  and  should  be  treated 
as  such. 

Peckhani,  J.,  in  Tibbetts  vs.  Mercantile  Credit  Guar- 
anty Co.,  73  Fed.  95. 

/  An  instrument  executed  by  a  surety  company  indemnify- 

ing an  employer  against  larceny  or  embezzlement  by  an 
employee,  though  denominated  a  bond,  is  in  legal  effect 
analogous  to  a  policy  of  insurance,  and  therefore  the  rules 
applicable  to  insurance  policies  should  be  applied  in  con- 
struing it. 

Am.  Bond'g  Co.  vs.  Burke,  85  Pac.  692  (Col.). 

The  bond  is  a  printed  one  *  *  *  prepared,  doubtless,  by  a 
skilled  attorney  in  the  company's  employ.  The  contract 
expressed  therein  is  but  a  form  of  insurance. 

Champion,  &e.,  Co.  vs.  American  Bonding  ti:  T.  Co., 
115  Ky.  863. 

Surety  companies  are  analogous  to  insurance  companies, 
where  the  application,  made  a  part  of  the  contract,  contains 
only  stipulations  which  bind  the  assured;  it  is  in  the  pos- 
session of  the  defendant,  and  if  there  is  a  breach  of  its 
terms  it  is  for  the  defendant  to  set  out  the  obligation,  and 
aver  and  prove  the  breaches  upon  which  it  relies. 

Bank  of  Tarboro  vs.   Fidelity  tS:  Deposit  Co.,  126 
K  C.  320. 

Although  this  form  of  insurance  is  of  recent  origin,  it  is 
now  (1896)  settled  that  the  general  rules  of  construction 
applicable  to  ordinary  insurance  policies  are  to  be  applied. 
Jackson  vs.  Fidelity  «&:  Casualty  Co.,  75  Fed.  359. 


CO-NSTRUCTION    OF    CORPORATE    FIDELITY    BONDS.  11 

A  contract  by  which  a  corporation,  though  called  a 
"guarantee"  or  ''surety"  company,  undertakes,  in  considera- 
tion of  premiums  paid  to  indemnify  the  other  party  to  such 
contract  against  losses  by  uncollectible  debts,  is  not  a  con- 
tract of  suretyship,  but  a  policy  of  insurance,  and,  as  such, 
subject  to  the  rule  that  any  ambiguities  in  the  policy  drawn 
up  by  the  insurer  who  makes  his  own  conditions,  are  to  be 
resolved  against  the  draftsman. 

Tibbetts  vs.  Mercantile  Cred.  Guar.  Co.,  73  Fed.  95. 

Suits  upon  insurance  policies  are  in  all  respects  analo- 
gous to  a  suit  on  a  corporate  fidelity  bond. 

Missouri,   K.   &   T.    Trust   Co.   vs.    German   ISTat'l. 
Bank,  77  Fed.  119. 

An  employer's  liability  bond  is  essentially  a  contract  of 
indemnity  against  loss,  governed  by  the  rules  applicable  to 
ordinary  life  and  fire  insurance  policies. 

Aetna  Ind.  Co.  vs.  J.  R.  Crowe  Coal  &  Mining  Co., 
154  Fed.  545. 

Corporate  fidelity  bond  issued  to  indemnify  employer 
against  loss  from  dishonest}^  of  employee  is  an  insurance 
contract,  and  subject  to  rules  of  construction  applicable  to 
insurance  policies  generally,  and  not  to  rules  applicable  to 
ordinary  sureties  for  accommodation. 

United   States   Fidelity   &  Guaranty  Co.    vs.   First 
Nat'l  Bank  of  Dundee,  233  111.  475. 

To  the  same  effect  arc  the  following  cases : 

Cowles  vs.  U.  S.  Fidelity  &  Guaranty  Co.,  32 

Wash.  120. 
Guarantee  Co.  vs.  Mechanics  Savings  »S:  Trust 

Co.,  80  Fed.  772. 


1-  I'lIK    LAW    oi'    KIliKI.rrV     I!()M>S. 

('iirsliiirs  vs.  Am,  Jiondinfi-  Co.,  1  Hi  Fed.  440. 
Am.  ('rod.  Trid.  i\>.  vs.  Carrollton  Furn.  Co.,  95 

Fed.  111. 
Supi-ciiic  Couiici]  vs.  Fidelity  k  Casualty  Co.,  03 

Fed.  48. 
IMiciiix  Ins.  Co.  vs.  Guarantee  Co.  of  ]S\  A.,  115 

Fed.  964. 
Am.  Crcd.  Tiid.  Co.  vs.  Wood,  fnote)  19  C.  C.  A. 

271. 
Perpetual  lildg.  cV  Loan  Ass'n  vs.  Fnited  States 

Fidelity  &  Guaranty  Co.,  118  la.  729. 
Am.  Bonding  Co.  vs.  New  Amsterdam  Cas.  Co., 

125  111.  App.  33. 
Livingston  vs.  Fidelity  k  Deposit  Co.,  81  X.  E, 

(Ohio)  330, 
Roark  vs.  City  Trust,  Safe -Deposit  and  Surety 

Co.,  131  ilo.  App.  401. 

9. — Treated   as    Insurance   Contracts    and    Hence    Construed    Most 
Favorably   to  Insured. 

Viewing  the  obligations  of  this  character  as  in  the  nature 
of  insurance  policies,  it  is  well  settled  that  any  language 
used  therein  of  doubtful  meaning  or  susceptible  of  two  con- 
structions, will  in  accordance  with  the  law  of  insurance,  be 
construed  most  strongly  against  the  insurer. 

10. — Leading  Case. 

The  Su])rcnie  Court  of  the  Ignited  States  in  a  leading  case 
on  the  subject  has  laid  down  the  rule  as  follows: 

"If  a  bond  of  fidelity  insurance  is  fairly  and  reasonably 
susceptible  of  tAvo  constructions,  tbat  most  favornM'^  to  the 


CONSTRUCTION^     OF    CORPORATE    FIDELITY    BONDS. 


18 


insured  must  be  adopted,  because  the  instrument  was  drawn 
by  the  attorneys,  officers,  or  agents  of  the  surety  company.' 
Am.  Sur.  Co.  vs.  Pauly,  170  U.  S.  133.i 
Am.  Sur.  Co.  vs.  Pauly,  170  U.  S.  160. 

This  rule  is  not  only  in  accordance  with  the  law  of  insur- 
ance, applicable  to  insurance  contracts,  but  is  in  accordance 
with  the  general  canon  of  construction  applicable  to  all  writ- 
ten contracts  and  pleadings,  and  supported,  by  equitable  con- 
siderations, that  words  are  to  be  construed  most  strongly 
against  him  who  employs  them. 


1. — These  two  cases  generally 
referred  to  in  the  later  cases  as 
the  PauUj  Cn.se,  were  the  first  to 
reach  the  Supreme  Court  of  the 
United  States,  where  the  contract 
sued  on  was  a  cori)orate  fidelity 
bond.  The  litigation  involved  a 
large  sum  and  was  ably  argued 
by  distinguished  counsel.  The 
Court  was  divided,  three  Justices 
dissenting  in  the  second  case. 
The  Court  decided  the  proposi- 
tion referred  to  in  the  text  above, 
to  wit,  that  where  the  meaning 
of  such  a  contract  is  doubtful,  it 
is  to  lie  construed  most  strongly 
in  favor  of  the  obligee. 

It  was  further  decided  that  a 
provision  in  such  a  contract  that 
the  insurer  shall  be  notified  of 
any  act  by  the  employee  which 
may  involve  a  loss,  as  soon  as 
practicable  after  the  occurrence 
of  such  act  shall  have  come  to 
the  knowledge  of  the  employer, 
does  not  require  notice  unless  the 
emi)loyer  has  knowledge,  not 
merely  suspicion,  of  the  exist- 
ence of  facts  which  would  justify 


a  careful  and  prudent  man  in 
charging  another  with  fraud  or 
dishonesty.      (See  Chapter  19.) 

That  the  president  of  a  na- 
tional bank  has  no  power  in  the 
ordinary  course  of  business,  to 
certify  to  the  correctness  of  a 
cashier's  accounts  for  the  pur- 
pose of  enabling  him  to  procure 
a  corporate  surety  bond.  (See 
Chapter  24.) 

That  a  i)rovision  in  the  con- 
tract that  a  written  statement  of 
loss  certified  as  provided  therein, 
"shall  be  prima  facie  evidence 
thereof,"  makes  such  a  statement 
prima  facie  proof  in  an  action 
l)rought  on  the  bond,  and  does 
not  relate  merely  to  the  presenta- 
tion of  the  claim  to  the  company 
and  its  acceptance  or  rejection 
thereof,  before  suit.  Mr.  .Justice 
White,  with  whom  Mr.  Justice 
Shiras  and  :\Ir.  Justice  Peckham 
conciuTed,  dissented  to  this  prop- 
osition in  a  lengthy  and  able  opin- 
ion. "While  the  provision  tliat  a 
prescrilx'd  proof  of  loss  slial!  be 
prima  facie  evidence  of  tlie  claim 


14 


I, AW    OK    IIDKIJ'I'V    BONDS. 


II. — Additional   Authorities. 

Refcrcnco  may  lie  liiul  to  the  tuUowiii^  addilioiiiil  uiithori- 
ties: 

Brandt,  Sur.  eV  Guar,,  Sec.  15. 

Cliampion  vs.  Anioricaii  TJoiiding  &  T.  Co.,  115 

Ky.  863. 
City  Trust,  etc.,  Co.  vs.  Lee,  204  111.  ti'.i. 
Granite  Building  Co.  vs.  Saville,  101  Va.  217. 
Carstairs  vs.  Am.  Bonding  Co.,  116  Fed.  449. 
Amer.  Cred.  Ind.  Co.  vs.  Carrollton  Fum.  Co., 

95  Fed.  111. 
Moiilor  vs.  Ins.  Co.,  Ill  U.  S.  335. 
Anderson  vs.  Fitzgerald,  4  H.  L,  Cas.  483. 
Travelers  Ins.  Co.  vs.  McCoukey,  127  U.  S.  661. 
Nat'l  Bank  vs.  Ins.  Co.,  95  V.  S.  673. 
Tucker  vs.  Fire  Ins.  Co.,  58  W.  Ya.  30. 


tiled  is  still  soiuetimes  found  iu 
corporate  fidelity  bonds,  the  in- 
corporation of  such  a  provision 
has  been  generally  discontinued, 
possibly  because  of  this  decision. 
The  necessary  effect  of  the  con- 
struction given  to  the  contract  in 
this  case  is  to  decide  that  by  its 
terms  the  plaintiff  was  entitled 
to  recover  without  making  any 
legal  proof  whatever  of  the  fact 
of  the  loss,  and  to  cast  upon  the 
defendant  the  burden  of  affirma- 
tively establislilng  the  negative 
proposition,  that  he  is  not  liable. 
This  radical  holding  of  the  Court 
so  severely  criticised  iu  the  dis- 
senting opinion  has  not  been  gen- 
erally followed.  (See  Chapter 
1.3.  pofit.)  In  Fidelity  and  Cas. 
<"n.  vs.  Kickhoff,  G3  Minn.  170.  a 


jirovisioii  in  a  contract  of  guar- 
ant.v  providing  that  a  voucher 
showing  payment  of  a  loss  by 
obligee  should  be  conclusive  evi- 
dence against  tlie  guarantor  was 
held  void  as  against  public  pol- 
icy. But  held  otherwise  in  Guar- 
antee Co.  of  N.  A.  vs.  Pitts.  7S 
Miss.  ,S37. 

It  was  further  held  tli.it  the 
'•retirement"  of  a  national  bank 
president  from  the  service  of  the 
bank  was  not  effected  by  the 
mere  suspension  of  the  bank  and 
the  taking  possession  thereof  by 
an  examinei'.  (See  discussion  of 
this  iioint  and  conflicting  deci- 
sions. Chapter  1.  sec.  10.  post; 
see  also  comparison  of  Supreme 
Court  Cases,  Chap.  2.  sec.  .53 
post.) 


CONSTKUCTION    OF    CORPORATE    FIDELITY    BONDS.  15 

Starr  vs.  Aetna  Life  Ins.  Co.,  41  Wash.  199. 
Lowenstein  vs.  Fidelity  &  Cas.  Co.,  88  Fed.  474. 
Am.  Cred.  Ind.  Co.  vs.  Wood,  73  Fed.  81. 
Thompson  vs.  Phenix  Ins.  Co.,  136  U.  S.  287. 
Banker's  Mut'l   Cas.   Co.   vs.    State  Bank,    150 

Fed.  78. 
Fricke  vs.  U.  S.  Ind.  Soc.,  78  Conn.  188. 
Swank  vs.  Ins.  Co.,  126  lovp-a,  544. 
Bickford  vs.  Ins.  Co.,  101  Me.  124. 
Am.  Bonding  Co.  vs.  Morrow,  96  S.  W.  (Ark.) 

613. 
Remington  vs.  Fidelity  &  Deposit  Co.,  27  Wash. 

429. 
Long  Brothers  Co.  vs.  United  States  Fidelity  & 

Guar.  Co.,  130  Mo.  App.  421. 
United  States  Fidelity  &  Guaranty  Co.  vs.  First 

Nat'l  Bank  of  Dundee,  233  111.  475. 
Sinclair  Co.  vs.  Nat'l  Surety  Co.,  132  Iowa,  549. 
Railroad  vs.  Cas.  Co.,  145  'N.  C.  114. 
1  Cooley's  Briefs  on  Ins.,  9. 

12. — Limitations  on  the  Rule. 

"But,"  says  Mr.  Justice  White,  in  a  dissentijig  opinion 
in  Am.  Sur.  Co.  vs.  Pauly,  170  U.  S.  160,  referring  to  the 
rule  laid  down  by  the  Court  in  that  case  that  any  ambi- 
guity in  a  fidelity  insurance  bond  is  to  be  construed  most 
strongly  against  the  insurer,  "I  know  of  no  case  which 
pushed  the  principle  to  the  extent  of  holding  that  the  ex- 
press provisions  of  a  contract  must  be  destroyed,  and  there- 
by a  liability  be  enforced  against  the  insurer,  not  in  har- 
mony with  the  contract,  in  conflict  with  its  spirit,  in  viola- 
tion of  the  manifest  intention  of  the  parties  and  productive 
of  great  injustice." 


l'»  llIK    LAW    OF    FlDEJ.nV     JJO.NJJS. 

And  to  tile  sMiiic  effect  are  the  following: 

Carstairs  vs.  Am.  Boiidg  Co.,  IDj  Fed.  44U. 
Granite  Bnilding  Co.  vs.  Saville,  101  Va.  217. 
Sinelnir  tV  Co.  vs.  Xat'l  Surety  Co.,   1:52   Iowa, 
549. 

13- — Where    Contract    Prepared    b>     Insured — American    Bankers' 
Association   Form. 

The  fairness  and  i)ropriety  of  the  rule  that  doubtful  lan- 
guage in  instruments  of  this  character,  issued  to  the  public 
by  corporations  engaged  in  the  business,  and  prepared,  as  the 
Courts  have  said,  by  their  "skilled  attorneys,"  and  containing 
words  having  a  technical  legal  meaning,  are  to<;)  obvious  to 
admit  of  any  doubt.  Whether  the  rule  will  be  applied  in  the 
absence  of  the  reasons  ui)on  which  it  is  founded  has  not  yet 
been  determined  in  this  class  of  litigation.  In  certain  lines 
of  business  standard  forms  of  bonds  are  used.  These  forms 
are  prepared  by  associations,  committees  or  other  representa- 
tives of  those  engaged  in  the  particular  business  to  which 
they  are  applicable,  and  the  surety  coq^orations  which  are 
invited  to  execute  them  have  had  nothing  whatever  to  do  \vith 
their  ])reparation.  A  familiar  illustration  of  the  character  of 
instimment  here  referred  to  is  the  American  Banker's  Asso- 
ciation Standard  Fidelity  Bond,  a  form  of  bond  prepared  by 
that  association,  and  now  extensively  used.  That  curious 
instrument  has  not  yet  been  construed  by  an  Appellate  Conrt. 
It  contains  various  provisions  of  doubtful  meaning  and  but 
for  the  fact  that  it  is  intended  for  the  use  of  corporate  sure- 
ties, experienced  in  the  business,  it  would  indeed  be  a  "snare 
for  the  nnwaiy." 

14. — Same — Discussion. 

For  instance,  a  number  of  statements  are  made  on  behalf 
of  the  bank,  as  to  the  duties,  accounts  and  other  like  matters 


CONSTEUCTION     OF    CORPOKATE    FIDELITY    BONDS.  17 

concerning  the  risk,  which  statements  are  made  a  part  of  the 
contract.  Each  of  these  statements  is  carefully  qualified  by 
the  jjhrase  that  it  is  made  to  the  best  of  the  knowledge  and 
belief  of  the  officer  making  the  same.  jSTotwithstanding  this 
qualification,  the  statements  are  expressly  warranted  to  be 
true.  If  the  statements  are  true,  of  course  no  question  as  to 
them  can  arise.  If  they  are  false  but  immaterial,  and  such 
a  case  is  not  likely  to  arise,  under  the  law  as  now  applied, 
such  immaterial  statements  would  not  become  material  by 
being  warranted,  nor  would  they  avail  as  a  defense  to  an 
action  on  the  bond.  If  they  are  false  and  material,  they 
would  prevent  a  recovery,  whether  warranted  to  be  true  or 
not,  and  such  so-called  warranty  would  add  nothing  to  their 
legal  effect. 

Other  defects  might  be  pointed  out.  Sufficient  has  been 
said,  however,  to  indicate  the  questions  which  will  sooner  or 
later  come  before  the  Courts  for  adjudication.  Which  must 
suffer  when  the  meaning  of  the  obligation  is  in  doubt,  the 
bank  or  the  surety  ?  Manifestly,  it  would  seem  that  in  such 
case,  the  rule  should  be  reversed,  since  the  reasons  therefor 
which  ordinarily  apply  to  the  latter  will  then  apply  to  the 
former. 

15. — Third  Theory  of  Construction — As  Indemnifying  Contracts. 

The  third  theory  of  construction  referred  to  above  is  well 
stated  in  a  recent  work  as  follows : 

"Courts  are  now  inclined  to  construe  bonds  and  contracts 
as  contracts  of  indemnity  only,  and  will  attach  more  impor- 
tance to  the  general  purpose  of  the  contract  than  the  pre- 
cise form  of  words  used,  or  the  terms  by  which  the  parties 
refer  to  it." 

2  Curr.  Law,  298. 


lo  'I'liK   I, AW  <)!•    l•II)l;l.^l^    udmjs. 

16. — Same — Illustrations. 

lu'tciciicc   lo  ;i    few  casi  s  will   sutfic(!  to  show  the  judicial 
altiliidc  here  i lid icalc*!. 

I  f  hoiuliug  corporations  are  to  be  sustained  by  the  busi- 
nt'ss  interests  of  this  country  as  being  useful  and  worthy 
of  support,  they  should  he  required  to  meet  their  obligations 
in  all  such  cases  as  we  have  ])res('iit('d  in  this  record. 

The  object  of  the  bond  in  suit  was  to  indemnify  or  insure 
the  defendant  in  error  against  loss  arising  from  any  act  of 
fraud  or  dishonesty  on  the  ])art  of  the  risk.  That  object 
should  not  be  defeated  by  any  naiTow  interpretation  of  its 
provisions  nor  by  adopting  a  construction  favorable  to  the 
surety  company  if  there  be  another  construction  equally 
admissible  under  the  terms  of  the  instrument  executed  for 
the  protection  of  the  obligee. 

Am.  Bondg.  Co.  vs.  Spokane  Bldg.  &  Loan  Soc,  130 
Fed.  737. 

The  object  of  an  indemnifying  bond  is  to  indemnify; 
and,  if  it  fails  to  do  this,  either  directly  or  indirectly,  it 
fails  to  accomplish,  its  primary  purpose,  and  becomes  worse 
than  useless.  It  is  worthless  as  an  actual  security  and  mis- 
leading as  a  pretended  one. 

A  surety  bond  should  be  construed  most  strongly  against 
the  company  and  most  favorably  to  its  general  intent  and 
essential  purpose. 

Bank  of  Tarboro  vs.  Fidelity  (S:  Deposit  Co.,   128 
N.  C.  366. 

The  contract  of  guaranty,  although  that  of  a  surety,  is 
to  be  construed  liberally  and  in  furtherance  of  its  spirit, 
to  promote  the  use  and  convenience  of  commercial  inter- 
course. 

Davis  vs.  Wells,  104  TJ.  S.  159. 


CONSTKLCTION     OF    COEPOKATE    FIDELITY    BONDS.  19 

Contracts  of  guaranty  will  be  liberally  construed  to  ac- 
complish the  purpose  of  indemnity  for  which  they  are 
made. 

United   States   Fidelity   &   Guaranty   Co.   vs.   First 
Nat'l.  Bank  of  Dundee,  233  111.  475. 

In  the  Paiilj  case,  170  U.  S.  133,  in  order  to  hold  the 
surety  company  liable  it  was  necessary  to  decide  that  the 
appointment  and  possession  of  a  receiver  in  no  wise  sus- 
pended the  corporation,  at  least  to  any  such  extent  as  to 
operate  the  discharge  of  the  employed.  In  the  Jackson 
case,  75  Fed.  359,  in  order  to  hold  the  surety  company,  the 
reverse  was  necessary,  and  the  Court  held,  says  Circuit  Judge 
Pardee,  that  an  entire  incapacity  siezed  the  corjDoration  the 
moment  the  statutoiy  receiver  took  possession.  In  the  latter 
case,  the  bond  provided  that  no  suit  should  be  brought  there- 
on, unless  the  same  was  commenced  within  twelve  months 
after  the  discovery  of  the  acts  complained  of,  and  such  dis- 
covery must  be  made  within  six  months  from  the  expiration 
of  the  bond  f>r  the  death,  dismissal  or  retirement  of  the  em- 
ployee. 

The  bank  suspended  business  on  July  24,  1893,  a  receiver 
was  appointed  August  14,  1893,  the  bank  resumed  business 
on  May  21,  1894,  discovered  frauds  committed  between 
April  and  July,  1893,  and  institued  suit  on  February  1, 
1895.     Held,  it  was  entitled  to  recover. 

It  was  further  held  in  the  Fauly  case  that  t\\Q  president 
of  a  bank  had  no  power,  in  the  ordinary  course  of  business, 
to  certify  to  the  fidelity  or  integrity  of  a  cashier  for  the  pur- 
pose of  enabling  him  to  procure  a  fidelity  bond,  and  hence 
the  bank  could  not  Ik'  deemed  to  have  any  knowledge  of  the 
giving  by  him  of  such  certificate. 

To  the  same  effect  is  United  States  Fidelity  »!*c  Guaranty 
Co.  vs.  Muir,  115  Fed.  264. 


20  IIIK    l-.WV    OK    MDhJ.lTV    BONDS. 

17. — Same — Further  Illustrations. 

Ill  Fidelity  cV  Ciis.  Co.  vs.  (Jato  City  ^'at'l  iJank,  U7  Ga. 
634,  it  was  hold  that  the  knowledge  on  the  part  of  the  bank's 
cashier  as  to  matters  concerning  which  the  surety  had  stip- 
ulated for  notice  was  not  the  knowledge  of  the  bank.  But  in 
Fidelity  and  Deposit  Co.  vs.  Courtney,  186  U.  S.  342,  it  was 
held  that  a  bank  was  chargeable  with  the  act  of  its  cashier 
in  making  an  employer's  statement. 

In  Lieberman  vs.  First  Nat'l  Bank,  2  Penn.  (Del.)  416, 
it  was  held  the  bank  was  not  bound  by  representations  of  its 
cashier  which  induced  the  defendant  to  become  surety  for  a 
teller. 

In  Am.  Bonding  Co.  vs.  Spokane  Bldg.  (Sc  Loan  Soc,  130 
Fed.  737,  where  the  bond  provided  that  representations  made 
by  the  employer  to  the  surety  were  wan-anted  to  be  true,  and 
a  representation  was  made  that  the  secretary  was  not  in- 
debted, held,  this  did  not  constitute  a  warranty  that  the  sec- 
retary was  not  indebted  as  a  fact,  but  only  that  he  was  not 
so  indebted  to  the  knowledge  of  the  association  or  its  officers, 
and  in  the  same  case  it  was  held  that  the  knowledge  of  such 
indebtedness  by  the  president  could  not  be  imputed  to  the 
society  without  proof  that  the  officers  knowledge  had  been 
communicated  to  the  board. 

In  City  Trust,  Safe  Deposit  &  Surety  Co.  vs.  Lee,  204 
111.  69,  it  was  hold  that  a  bond  prepared  and  issued  by  a 
surety  company  guaranteeing  an  employer  against  "loss  by 
reason  of  the  dishonesty  or  fraud,  amounting  to  larceny  or 
embezzlement,"  of  an  employee,  is  a  giiaranty  against  dis- 
honestv  or  fraud  of  the  employee,  whether  such  as  would 
render  him  liable  to  indictment  for  larceny  or  embezzle- 
ment or  not.  And  to  the  same  offoct  is  American  Bonding  «S: 
Trust  Co.  vs.  Xew  Amsterdam  Cas.  Co..  12.")  111.  A]i]\  33. 

In  Sherman  vs.  Harbin,  125  Iowa,  174,  it  was  held  that 
an  insurance  company  was  not  bound  by  a  certificate  fur- 


CONSTRUCTION     OF    CORPORATE    FIDELITY    BONDS.  21 

nished  by  the  secretary  to  a  surety  company  proposing  to  exe- 
cute the  president's  bond  to  the  effect  that  the  books  and  ac- 
counts of  the  president  had  been  examined  and  found  correct. 
And  held,  further,  that  where  a  bond  had  been  executed  on 
behalf  of  the  president,  which  bond  was  not  in  the  usual  form 
of  such  instruments,  but  more  nearly  resembled  a  common 
law  obligation  stipulating  for  the  faithful  discharge  of  duty, 
and  subsequently  a  certificate  was  issued  by  the  surety  guar- 
anteeing the  fidelity  of  said  president  for  an  ensuing  term, 
subject  to  the  covenants  and  conditions  of  the  aforesaid  bond, 
that  such  certificate  was  in  no  sense  a  renewal  or  continuance 
of  the  original  bond,  but  a  new  and  independent  undertak- 
ing, and  that  the  surety  was  liable  for  the  full  penalty  of 
both  the  original  bond  and  the  certificate.  And  held,  fur- 
ther, that  the  failure  to  give  notice  of  default  as  required  by 
the  bond,  was  not  a  breach  thereof  because  the  acts  of  the 
president  complained  of  did  not  constitute  an  appropriation 
of  money  belonging  to  the  company  to  his  own  benefit,  he 
having  used  a  fund  assessed  to  pay  death  losses  for  the  pur- 
pose of  resisting  certain  claims. 

In  Remington  vs.  Fidelity  &  Deposit  Co.,  27  Wash.  429, 
the  surety  was  held  liable,  notwithstanding  the  fact  that  there 
was  a  delay  of  forty-five  days  in  giving  notice  of  default 
where  the  bond  required  immediate  notice;  and  notwith- 
standing the  further  fact  that  the  employer  had  delivered  to 
the  surety  before  the  renewal  of  the  bond  a  certificate  to 
the  effect  that  the  accounts  and  books  of  the  employee  had 
been  examined  and  found  correct,  which  statement,  although 
without  fraud,  was  untrue. 

1 8. — Same — Further  Illustrations. 

In  Hawley  vs.  United  States  Fidelity  and  Guaranty  Co., 
100  App.  Div.  12,  affirmed,  184  N.  Y.  549,  the  surety  had 


ZU  TJIK    J.AW    OF    Ji'IDKMTY    BONDS. 

cxc'cnitcd  two  bonds  on  Ijchald  of  an  olticcr  of  a  fraternal 
orgaiii/.iilion,  one  on  January  11,  18D9,  and  the  other  on 
June  "),  11)00. 

]j()th  of  the  bonds  provided  that  the  defendant  should  be 
liable  for  a  misappropriation  ''occurring  during  the  contin- 
uance of  this  bond  and  renewal  thereof  and  discovered  dur- 
ing said  continuance^  or  within  six  months  thereafter,  or 
within  six  months  from  the  death  or  dismissal  or  retirement 
of  the  employee  from  the  service  of  the  employer;"  also, 
"that  the  company,  upon  the  execution  of  this  bond,  shall  not 
thereafter  be  responsible  to  the  employer  on  behalf  of  said 
employee,  and  upon  the  issuance  of  any  bond  subsecpient 
hereto  upon  said  employee  in  favor  of  said  employer,  all  re- 
sponsibility hereunder  shall  cease  and  determine,  it  being 
mutually  understood  that  it  is  the  intention  of  this  provision 
that  but  one  (the  last)  bond  shall  be  in  force  at  one  time." 
There  was  misappropriation  during  the  period  covered  by 
both  bonds,  which  was  not  discovered  until  ^lareh  0-11. 
1901,  when  the  officer  was  dismissed. 

The  trial  Court  directed  a  verdict  against  the  defendant 
for  the  full  amount  misappropriated  under  both  bonds.  The 
Appellate  Division  of  the  Supreme  Court  affirmed,  in  an 
opini(m  without  citation  of  authority,  the  ruling  of  the  trial 
Court  and  the  Court  of  Appeals  affirmed,  without  opinion, 
the  judgment  of  the  Supreme  Court. 

The  Court  held,  that  even  assuming  the  second  bond  to  be 
a  separate  and  distinct  one,  and  not  a  mere  renewal  i*f  the 
first  one,  the  plaintiff  M'as  entitled  to  recover  the  amount  mis- 
appropriated under  the  first  bond,  as  well  as  the  amount 
misappropriated  under  the  second  bond;  that  the  failure  to 
discover  the  misappropriation  of  the  amount  under  the  first 
bond  within  six  months  after  the  tennination  of  that  bond, 
did  not  under  the  clau-ie  of  the  bond  first  above  quoted,  pre- 


CONSTRUCTION    OF    CORPOEATE    FIDELITY    BONDS.  23 

chide  a  recovery,  it  appearing  that  the  discovery  was  made 
within  six  months  after  the  officer's  dismissal,  and  hence  was 
within  the  language  of  the  clause  in  question  ;  that  a  recovery 
of  the  amount  misappro^jriated  under  the  first  bond  was  not 
prohibited  by  the  clause  of  the  second  bond,  last  above  quoted, 
for  the  reason  that  it  was  not  the  purpose  of  such  clause  to 
provide  that  the  execution  of  the  second  bond  should  cancel 
a  liability  occurring  during  the  term  of  the  first  bond,  but 
simply  to  terminate  all  responsibility  under  the  first  bond 
as  far  as  future  misappropriations  were  concerned.  Even  in 
view  of  the  theory  of  liberal  construction  here  under  discus- 
sion, it  is  difficult  to  perceive  how  future  responsibility  could 
arise  under  a  bond  which  had  already  terminated  by  its 
terms,  and  another  been  issued  in  its  place. 

With  reference  to  this  point,  the  Court  says : 

"The  provision  is  that  all  responsibility,  not  all  liahility, 
should  cease  and  determine  upon  the  issuance  of  the  subse- 
quent bond.  The  more  reasonable  construction  is  that  the 
intention  was  to  terminate  all  responsibility  under  the  first 
bond  upon  the  issuance  of  the  second  one,  so  far  as  future 
misappropriation  was  concerned,  so  that  there  should  be 
but  one  bond  in  force  at  the  same  time,  but  that  it  Avas  not 
intended  to  cancel  any  liability  already  incurred  while  the 
first  bond  was  in  force." 

Jn  other  words,  while  the  surety  ceased  to  be  res;poiu'iibIe 
it  remained  Ilahlr  for  the  default  under  the  first  bond,  at  the 
same  time  becoming  liable  or  res])onsible  under  the  second. 

It  was  further  held,  in  this  case,  that  an  employer's  cer- 
tificate, delivered  prior  to  the  execution  of  the  second  b(md. 
which  constituted  a  warranty  of  the  facts  therein  stated,  and 
certified  that  the  accounts  of  the  officer  had  been  examined 
and  found  correct,  would  not  defeat  a  recovery,  because  it 
was  made  to  the  best  of  the  knowledge  and  belief  of  the 


21 


rill';    LAW    (il-     !•  IDKl.II'V     I'.D.NDS. 


plaiiiliir,  iiiid  was  true  because  ihe  niisappro[)rialioii  was  not 
discovered  until  sometime  later.     The  Court  says: 

"The  statciiM  III  lliiit  his  aceouiits  were  found  on  examina- 
tion to  he  correct  up  to  that  time  was  true.  There  was  no 
absolute  statement  that  his  accounts  were  correct. "- 


2. — No  attempt  will  be  made 
here  to  refonoile  this  case  with 
other  decisions.  It  is  unique  m 
the  law  of  suretyship  and  insur- 
ance, and  must  stand  alone.  No 
authority  has  been  cited  in  the 
opinion  of  the  Court,  and  no  other 
Court  has  "cited  this  ease  as  an 
autliofity.  The  decisions  of  the 
Federal  and  State  Courts,  as  w(«ll 
as  of  tlie  same  Court,  are  adverse 
to  the  ruling  here  announced, 
while  there  is  no  authority  any- 
where in  support  of  it.  As  con- 
cerning the  question  of  douWe  lia- 
bility, reference  may  he  had  to 
the  following  cases: 

In  Proctor  Coal  Co.  vs.  I'.  S. 
Fidelity  &  Guaranty  Company. 
124  Fed.  424,  the  bond  con- 
tained a  provision  similar  to 
that  Iiere.  The  bond  covered  a 
period  of  one  year  and  was  re- 
newed by  two  snccessive  re- 
newal certificates  each  for  one 
year.  Suit  was  bronght  for  re- 
covery for  defalcations  during 
the  original  bond  and  each  re- 
newal. On  demurrer  to  the  dec- 
laration, the  Court  held  there 
could  be  no  recovery  for  losses 
sustained  prior  to  the  execution 
of  the  last  renewal. 

In  Lombard  Inv.  Co.  vs. 
AmericaTi  Surety  Co..  nn  Fed. 
47t>.  while  the  phraseology  of 
the  provision  is  slightly  differ- 


ent, its  meaning  is  the  same. 
That  the  parties  understood 
that  all  liability  or  responsi- 
bility ceased  upon  the  execution 
of  a  new  bond  is  evidenced  by 
the  fact  that  they  executed  a 
separate  provision  which  re- 
cites that  "whereas  said  bond 
allowed  six  months  from  date 
of  expiration  in  which  to  make 
claim  for  losses  thereunder,  the 
condition  contained  in  lines, 
etc..  is  hereby  modified  so  as  to 
recognize  the  right  of  the  em- 
ployer to  make  claim  within  six 
months  from  the  expiration  of 
the  bond  first  mentioned  for 
losses  occurring  thereunder." 
and  i)roviding  that  total  liabil- 
ity shall  not  exceed  penalty  of 
last  bond.  Suit  on  three  counts 
claiming  for  losses  under  each 
bond.  Held,  there  could  be  re- 
covery under  any  of  the  bonds 
except  as  covered  by  the  special 
provision  above  referred  to. 

In  De  Jernette  vs.  Fidelity  & 
Casualty  Co..  17  Ky.  Law  Rep. 
lOSSi.  ,33  S.  W.  Rep.  S2«.  an  at- 
tempt was  made  to  recover  upon 
a  surety  contract  and  upon  each 
of  two  renewals.  Held,  each 
was  a  new  contract  and  there 
could  be  no  recovery,  the  loss 
not  having  been  discovered 
within  the  three  months  re- 
quired by  the  bond. 


CONSTRUCTION     OF    COKPOKATE    FIDELITY    BONDS. 


25 


19. — Same — Recent  Important  Illustration  of  Construction  as   In- 
demnifying Contract  Regardless  of  Terms. 

A  striking  example  of  the  form  of  liberal  construction 
here  referred  to  will  be  found  in  the  case  of  Aetna  Ind.  Co. 
vs.  J.  R.  Crowe  Coal  &  Mining  Co.,  154  Fed.  545,  one  of 
the  most  recently  decided  cases. 


In  Mayor,  etc.,  vs.  Harvey, 
114  Ga.  733,  the  provision  in  the 
bond  was  similar  to  the  one 
here.  Suit  was  brought  on  the 
bond,  and  subsequently  an  at- 
tempt was  made  to  amend  so 
as  to  include  a  large  shortage 
under  two  renewals.  The  Court 
held  such  amendment  could  not 
be  made,  as  it  would  add  a  new 
cause  of  action,  and  that  there 
could  be  no  recovery  on  the 
bond  under  this  provision  and 
another  which  required  discov- 
ery of  loss  within  six  mouths. 
The  Court  said :  "The  original 
bond  was  terminated  by  the 
subsequent  renewals,  and  the 
latter  were  in  fact  new  and  dis- 
tinct contracts  which  adopted 
by  reference  all  the  terms  and 
conditions  of  the  first.  That 
such  renewals  of  bonds  or  con- 
tracts of  this  nature  are  new 
and  distinct  contracts  there  can 
be  no  question,  *  *  *  It  is  the 
duty  of  Courts  to  construe  con- 
tracts as  they  are  made  *  *  *  ." 

In  First  Nat.  Bank  vs.  U.  S. 
Fidelity  &  Guaranty  Company, 
110  Tenn.  10,  the  bond  did  not 
contain  the  provision  referred 
to.  A  bond  in  the  penalty  of 
?!7,000  was  executed  for  one 
year,  which  was  renewed  by  re- 
newal certificate  for  a  like  pe- 


riod. The  defalcations  of  the 
employe  amounted  to  more  than 
.$7,000  during  both  the  period 
of  the  bond  and  of  the  renewal. 
The  trial  Court  gave  judgment 
against  the  surety  for  $14,000. 
This  judgment  was  reversed  on 
appeal,  and  judgment  entered 
for  .$7,000. 

In  Florida  Central  Railroad 
Co.  vs.  Am.  Surety  Company, 
99  Fed.  074,  the  bond  contained 
a  provision  almost  exactly  like 
this  one.  The  Court  said  :  "The 
meaning  of  the  part  of  the  con- 
tract which  declares  that  upon 
the  execution  of  a  stipulated 
amount  of  risk  or  insurance  in 
behalf  of  an  employe,  the  com- 
pany shall  not  be  responsible 
under  any  previous  insurance 
of  said  employe,  becomes  very 
clear,  and  is  that,  when  a  new 
schedule  of  the  amount  of  in- 
surance in  behalf  of  any  em- 
ploye formerly  on  the  schedule 
has  been  executed  or  complet- 
ed, and  actually  or  construc- 
tively accepted,  the  old  or  pre- 
vious insurance  against  losses 
previously  committed  by  him 
is  at  an  end  and  that  for  these 
losses  the  companij  is  no  longer 
liable." 

In  Am.  Bonding  Co.  vs.  Mor- 
row, 96  S.  W.    (Ark.)   613.  de- 


26 


llll'.    I, AW    OK    I'lIiKI.I  TV     liONUS. 


Ill  tli.-it  cMsc,  tlic  iii.lciiiiiity  company  issued  in  1001  the 
usiiiil  rmiii  (if  iidclity  bond,  guaranteeing  against  loss  by 
fraud  and  (lishonesty  amounting  to  larceny  or  embezzlement 
on  the  part  of  a  designated  employee,  the  bookk('e[)er  and 
cashier  of  a  coal  company.  The  original  bond  was  continued 
in  force  by  renewal  certificates  issued  annually,  the  last  one 
covering  the  period  from  June.  ll»o;5  to  dune,  1904.     In  a 


c'idod  .siiae  the  llawley  Case, 
It  was  held  that  where  a  bond 
issued  by  a  surety  company  in- 
demnifying an  emjiloyer  against 
default  of  an  employe  for  a 
certain  amoiuit  provided  that 
it  should  not  lapse  at  the  end 
of  the  term  if  renewed,  but 
that  the  liability  of  the  surety 
should  not  be  cumulative,  the 
total  liability  for  the  whole  pe- 
riod represented  by  the  origi- 
nal term  and  renewal  periods 
was  limited  to  the  amount  spec- 
ilied  in  tlie  bond.  In  this  case 
there  was  an  original  bond  in 
the  penalty  of  $5,000,  and  two 
renewal  certificates,  and  there 
was  default  under  the  bond  and 
each  renewal,  that  under  the 
last  renewal  exceeding  tlie  pen- 
alty of  the  bond.  Ifpl<1.  recov- 
ery could  be  had  for  .$r>.000 
only. 

A  careful  investigation  fails  to 
disclose  any  authority  whatever 
in  support  of  the  distinction 
drawn  l)y  the  Court  in  this  case 
between  the  words  "liable"  and 
"responsible,"  while  all  the  au- 
thoritative lexicographers,  as  well 
as  legal  terminologists.  hold  that 
the  words,  in  the  sense  in  which 


they  arc  here  employed,  are  to  be 
given  a  synonymous  meaning. 

Century  Dictionary. 

Webster's   Dictionary. 

Standard  Dictionary. 

Worcester's  Dictionary. 

Soule's  Synonyms. 

Fernald's  English  Syno- 
nyms. 

Words  and  Phrases. 

Bouvier's  Law  Dictionary. 

Black's  Law  Dictionary. 

Anderson's  Law  Diction- 
ary. 

Abbott's  Law  Dictionary. 

English's   Law   Dictionary. 


In  the  argument  in  the  Haw- 
ley  Case,  it  was  claimed  by  coun- 
sel for  appellee,  that  the  appel- 
lant had  conjured  up  the  spectre 
of  a  suit  on  a  bond  fifty  years 
after  the  bond  was  given.  It 
came  to  pass,  liowever.  that  in 
the  first  similar  ease  to  arise  in 
the  State  of  New  York,  to  the 
kn<iwledge  of  the  author,  after 
the  afhrraance  of  the  aforesaid 
case  by  the  Court  of  Appeals, 
and  within  a  short  time  there- 
after, the  "spectre"  took  on  the 
form  of  a  grim  reality  in  the 
demand  for  the  payment  of  manj^ 


CONSTRUCTION     OF    CORPOEATE    FIDELITY    BONDS. 


27 


suit  subsequently  instituted  on  the  contract  for  the  amount 
of  the  penalty  of  the  original  bond,  to  wit,  five  thousand  dol- 
lars, recovery  was  had  for  over  forty-four  hundred  dollars, 
the  amount  shown  to  have  been  embezzled  during  the  period 
of  the  last  renewal,  the  entire  defalcation,  which  occurred 
during  the  last  two  years  of  the  term,  being  about  seven 
thousand  dollars. 

The  evidence  tended  to  shoM''  that  prior  to  the  execution  of 
the  last  renewal  certificate,  there  had  been  considerable  cor- 
respondence between  the  indemnity  company,  their  local  rep- 
resentatives and  the  coal  company  regarding  the  execution  of 
an  employer's  statement  which  resulted  in  the  rejection  by 
the  indemnity  company  of  a  second  form  of  certificate  ten- 


thousands  of  dollars  for  defalca- 
tions committed  during  tlie  pe- 
riod of  six  years  prior  to  notice 
to  the  surety,  the  demand  being 
made  under  each  of  several  bonds 
and  various  renewals,  executed 
on  behalf  of  the  same  individual, 
and  there  having  been  a  period 
between  the  bonds  when  there 
was  no  bond  or  renewal  in  force. 
This  somewhat  unusual  and 
perhaps  extreme  case  is  cited  to 
show  to  what  remarkable  results 
the  decision  in  the  Hawley  Case 
may  lead.  As  we  understand  that 
decision,  if  a  bank  cashier  should 
give  a  bond  for  the  penalty  of 
ten  thousand  dollars,  in  the  iden- 
tical form  of  the  bond  in  the 
Hawley  Case,  to  cover  his  ])osi- 
tion  for  one  year,  and  should  an- 
nually thereafter  for  nine  years, 
execute  a  similar  bond,  in  like 
penalty,  and  at  the  end  of  the 
tenth  year  it  should  be  discov- 
ered that  he  was  a  defaulter  and 


be  then  dismissed,  and  upon  in- 
vestigation it  should  be  found 
that  he  had  embezzled  ten  thou- 
sand dollars  or  more  during  each 
year,  that  in  such  case  the  bank 
could  recover  from  the  surety, 
not  the  penalty  of  "one  (the  last) 
bond,'  according  to  the  language 
of  the  instrument,  but  the  aggre- 
gate penalty  of  all  the  bonds,  to 
wit,  one  hundred  thousand  dol- 
lars. 

If  a  recovery  may  be  had  upon 
a  bond  which  has  expired  for  a 
year,  or  beyond  the  limitations 
prescribed  therein,  no  reason  is 
perceived  why  a  recovery  may 
not  be  had  upon  a  bond  at  any 
time  within  the  limitations  pre- 
scribed by  the  State.  If  a  re- 
covery is  permitted  In  such  case 
years  after  the  loss  occurs,  when 
the  principal  may  be  dead  or  re- 
moved, the  memory  of  witnesses 
uncertain  and  the  facts  difficult 
of  ascertainment,  the  whole  busi- 


28 


LAW    (>)■     !•  IIiKIJTV     IIONDS, 


(lci'(  .1,  ;iii(l  llic  i:i\iii!i'  of  it>  nil  iiiint  mil  iis  to  the  tcriiis  upon 
wliicli  il  would  renew  llie  IhmkI,  in  ii  h^ttor  to  their  agents, 
stating  as  follows : 

"Wo  Sinn  tlic  iiiattcr  n|>,  iIhh,  to  the  effect  that  if  it  is 
desired  tlinl  this  hond  shall  he  renewed,  a  eomplete  and 
systematic  jindit  of  Mr.  Graves'  (the  employee)  account 
must  be  made  in  a  business-like  way  and  the  employers  to 
fill  out  and  send  to  us,  through  your  office,  the  enclosed 
blank  form  of  employer's  statement,  F.  4." 

The  indemnity  company  had  previously  written  that  it 
would  require  additional  papers  to  issue  a  new  bond.  Fol- 
lowing the  position  assumed  by  the  indemnity  company,  as 
shown,  the  coal  company  caused  the  audit  to  be  made,  filled 


ness  of  fidelity  insurance  would 
be  thrown  into  confusion  and  un- 
certainty. Sucli  action  would, 
against  the  policy  of  the  law,  en- 
courage the  presentation  of  stale 
demands,  countenance  the  negli- 
gence, incompetency  or  supine- 
ness  of  trustees  of  financial  In- 
stitutions, and  tend  to  prevent 
or  postpone  the  detection  of  de- 
faults, the  i>revention  or  early 
detection  of  which,  says  the  Fed- 
eral Supreme  Court,  in  giving 
expression  to  the  experience  of 
the  financial  world,  are  of  even 
more  vital  importance  to  such 
institutions  than  to  the  guaran- 
tors of  the  fidelity  of  their  em- 
ployes. 


Independent  of  any  considera- 
tion of  the  rights  of  the  partio 
to  such  a  contract,  if  the  ruling 
in  the  Hawley  Case  were  to  he 
generally   followed,   no   guaranty 


company  could,  with  any  degree 
of  accuracy,  comply  with  the  re- 
(piirements  of  the  Insurance  De- 
partments of  the  several  States, 
by  setting  aside  an  appropriate 
reserve  to  meet  obligations  upon 
outstanding  risks.  Surely  the 
companies  would  not  be  required 
to  carry  as  outstanding  obliga- 
tions all  fidelity  bonds  written  by 
them  until  action  thereon  was 
barred  by  the  limitations  pre- 
scribed by  the  States  in  which 
such  bonds  were  executed,  and 
yet  this  requirement  would  seem 
to  be  the  legitimate  and  logical 
result  of  the  above  decision,  in- 
asmuch as,  according  to  it.  a  re- 
covery may  apparently  be  had 
at  any  time  within  the  limita- 
tions of  the  State. 

For  further  reference  to  the 
extent  of  the  surety's  liability, 
where  there  are  more  than  one 
obligation,  see  Chapter  fi. 


CONSTRUCTION    OF    CORPORATE    FIDELITY    BONDS.  29 

out  the  statement,  signed  it,  and  sent  it  to  the  indemnity 
company,  through  its  local  agents,  whose  letter  which  recited 
its  transmission,  the  fact  that  the  audit  had  been  made, 
closed  with  the  words,  "Trusting  you  will  see  fit  to  renew 
the  bond."  The  Coal  Company  having  complied  with  the 
terms  on  which  the  indemnity  company  had  informed  it  that 
it  would  renew  the  bond,  the  latter  immediately  issued  the 
renewal  certificate,  continuing  the  bond  in  force  from  June, 
1903,  the  said  employer's  statement  being  dated  February 
24,  1903. 

The  employer's  statement  contained  answers  to  various 
questions  propounded  by  the  indemnity  company,  together 
with  the  promissory  stipulation  that  the  counter  signature 
of  the  general  manager  or  president  of  the  coal  company 
would  be  required  on  checks  signed  by  the  bonded  employee, 
and  concluded  as  follows : 

"It  is  hereby  agreed  by  the  undersigned  that  the  above 
answers  are  to  be  taken  as  conditions  precedent  to  and  as 
the  basis  of  execution  of  the  said  indemnity  bond  and  in 
consideration  of  the  issuance  of  said  indemnity  bond  by  the 
company;  it  is  further  agreed  that  the  checks  and  super- 
vision above  described  shall  be  observed." 

The  indemnity  company  proved  without  contradiction  that 
more  than  300  checks,  which  aggregated  more  than  $150,- 
000.00  were  issued  by  the  employee  without  the  counter- 
signatures convenanted ;  that  the  loss  complained  of  resulted 
in  large  part,  if  not  entirely,  from  the  use  of  these  cheeks. 

In  the  face  of  this  evidence,  the  United  States  Circuit 
Court  of  Appeals  for  the  Eighth  Circuit,  by  a  divided  Court, 
Sanborn,  Circuit  Judge,  dissenting,  affirmed  the  decision  of 
the  trial  Court,  and  held  that  the  last  renewal  did  not  include 
the  employer's  statement  referred  to  above.  The  Court  fur- 
ther held  that  where  the  accounts  were  extensive  and  com  pi  i- 


•50  IIIK    I. AW    <tl-     lIDKI.riV     IJONDS. 

calcd,  iiiid  liad  liccii  I'iilsiHcd  hy  the  cinployoc,  a  iir»ti(;(*  of  a 
l)r(ihal)l('  claim  liivcii  the  surety  thirty-five  days  after  the 
tirst  diseoxcry  of  ii'i'en'iilarit  ies,  and  notiee  of  the  aiiiouiit  of 
the  ehiiiii  i;iveii  the  surety  sixty-one  days  after  such  discov- 
ery, were  a  sufficient  conij)liance  with  the  ref|nireiiient  of 
''immediate  notice"  contained  in  the  bond  ;  and  further  that 
where  the  original  hnnd,  alrhoiiiih  prepared  witli  the  inten- 
tion of  having-  the  princijial  sign  it,  did  not  make  such  exe- 
cution a  condition  for  the  creation  of  liability,  the  failure  of 
the  ])rincipal  to  sign  the  bond  is  cured  by  the  subsequent  re- 
newals thereof  and  the  acceptance  of  i»rcininms  therefor, 
even  in  the  absence  of  evidence  that  the  indemnity  company 
had  knowledge  of  such  defect  when  the  renewals  were  issued. 
Referring  to  the  employer's  statement,  the  Court  after 
quoting  the  language  of  the  continuation  certificate,  says : 

"The  plain  and  unambiguous  language  of  the  contract 
just  quoted  shows  that  what  the  parties  apparently  did  was 
to  continue  in  force  for  a  third  year  the  original  contract 
knoA\Ti  as  bond  F.  1,774,  subject  to  all  the  covenants  and 
conditions  thereof,  and  by  fair  and  reasonable  intendment, 
not  subject  to  the  terms  and  conditions  of  any  other  instru- 
ment." 

Again,  the  Court  says : 

"Turning  now  to  the  statement  of  February  24th,  we 
perceive  nothing  in  the  terms  employed  or  in  any  implica- 
itons  suggested  to  indicate  an  intention  to  make  the  state- 
ment the  basis  of  or  consideration  for  any  renewal  of  the 
old  bond.  Xo  intimation  can  be  found  indicating  in  the 
slightest  degree  that  the  parties  intended  the  answers  to 
the  questions  to  be  conditions  precedent  to  or  to  form  the 
basis  of  the  execution  of  any  other  bond  whatsoever,  and 
certainly  not  of  the  renewal  bond  F.  1,774.  The  agreement 
found  at  the  end  of  the  statement  making  the  answers  to 
questions  propounded  in  it  warranties  or  conditions  prece- 


CONSTEUCTIOK^    OF    CORPORATE    FIDELITY    BONDS.  31 

dent  to  the  validity  of  the  bond  has  no  application  to  this 
case.  We  find  no  agreement  in  any  correspondence  passing 
between  plaintiff  and  defendant  that  the  warranties  con- 
tained in  the  statement  of  February  24th  should  be  condi- 
tions precedent  to  the  validity  of  the  contract  renewing  the 
old  bond  F.  1,774.  The  statement  of  February  24:th  was 
obviously  made  to  secure  favorable  action  on  Graves'  pend- 
■  ing  application,  and  in  effect  formed  a  part  of  it."^ 

20. — Same — Opposite  Holding  in  More  Recent  Case. 

In  a  decision  rendered  two  months  later  than  the  above  the 
Supreme  Court  of  Louisiana,  upon  facts  veiy  similar,  held 
just  the  opposite  view,  that  is  to  say,  that  the  fidelity  com- 
pany was  not  liable  upon  a  renewal  contract  where  the  em- 
ployer's statement  issued  prior  to  such  renewal  was  false. 
Max.  J.  Winkler,  Brokerage  Co.  vs.  Fidelity  and 
Deposit  Co.  of  Md.,  44  S.  E.  449. 
To  the  same  effect  are  the  following  late  eases : 

United    States    Fidelity    &    Guaranty    Co.    vs. 

Downey,  38  Colo.  414. 
Glidden  vs.  United  States  Fidelity  k  Guaranty 

Company,  198  Mass.  109. 
Willoughby  vs.  Fidelity  &  Deposit  Co.,  IG  Okla. 
546. 

The  aforegoing  cases,  it  is  believed,  will  clearly  indicate 
the  character  of  liberal  construction  here  referred  to  under 
the  third  title  to  this  chapter. 

21.— Summary. 

Summing  up  then,  a  review  of  the  authorities,  it  will  ap- 
pear that  corporate  fidelity  bonds  are  to  be  treated  as  eon- 

3. — The  italics  are  ours.  Fur- 
ther comment  would  seem  to  be 
unnecessary. 


32 


rilK    I, AW    OF    FIDELITY    BONDS. 


tracts  (it  iiisuriiiicc  and  indeiimiiv,  mid  constnicd  ino>t 
Htroiiglv  aiiainst  tlic  insurer  and  in  i'iwoy  <>(  cfTcctinir  tin; 
purpose  for  which  given,  althongh  nnainhij;nr»ns  and  valid 
stii)ulati(ins  are  not  to  I)e  disregarded.  The  Court  takes  the 
contract  by  the  four  corners,  so  to  speak,  and  seeks  to  ascer- 
tain the  meaning  thereof  as  of  any  other  contract,  and  when 
ascertained  will  enforce  it  so  as  to  give  effect  to  every  part 
of  it,  if  possililc.  In  case  of  doubt  or  uncertainty,  the  e*oi- 
struction  will  be  in  favor  of  the  insured. 

For  liability  of  surety  on  corporate  fidelity  bonds  filed  in 
place  of  statutory,  official  bonds,  see  Cba])ter  7  on  that 
subject. 

22. — Construction  of  Judicial  Bonds. 

It  is  perhaps  unnecessary  to  state  that  bonds  executed  by 
corporate  sureties  on  prescribed  forms  in  judicial  proceed- 
ings are  construed  precisely  like  those  executed  by  private 
individual  sureties. 

23. — Construction  of  Contract  and  Other  Similar  Bonds  by  Com- 
pensated Corporate  Surety. 

The  text  writers  generally  hold  the  view  that  the  same 
rule  applies  to  other  bonds  executed  by  corporate  sureties, 
where  they  sign  the  instrument  as  presented  to  them,  and 
have  no  ]iart  in  its  preparation,  such,  for  example,  as  bonds 
guaranteeing  the  ])erfonnance  of  contracts,  but  the  Supreme 
Court,  in  United  States  vs.  American  Surety  Co..  200  T'. 
S.  199,  says: 

"In  U.  S.  F.  &  G.  Co.  vs.  Golden  Co.,  191  U.  S.  416.  the 
question  whether  surety  companies  which  are  such  for  com- 
pensation, are  entitled  to  the  same  strict  construction  of 
their  rights  and  obligations  as  is  accorded  to  private  sure- 
ties Avho  become  such  without  reward  or  profit,  was  left 
open;  but  it  was  said:  The  rule  of  strirtlss^imi  juris  is  a 
stringent  one.  and  is  liable  at  all  times  to  work  a  practical 


REPKESENTATIOKS    AND    WARRANTIES. 


33 


injustice.  It  is  one  which  ought  not  to  be  extended  to  con- 
tracts not  within  the  reason  of  the  rule,  particularly  when 
the  bond  is  underwritten  by  a  corporation  which  has  under- 
taken for  a  profit  to  insure  the  obligee  against  a  default."'* 


4. — See  also  Atlantic  Trust  & 
Dep.  Co.  vs.  Town  of  Lowinburg, 
163  Fed.  690. 


CHAPTER  IL 


REPRESENTATIONS    AND    WARRANTIES. 


24.  The    subject    of    much    con- 

flict and  difficulty. 

Definitions. 

25.  Aruould's  definition. 

26.  May's  definition. 

27.  Kerr's  definition. 

28.  Elliott's  definition. 

29.  Deductions  from  the  author- 

ities. 

30.  Ellis'   definition. 

31.  Leading  case. 

32.  Burden '  of  proof  of  Repre- 

sentation or  Warranty  in 
corporate  fidelity  con- 
tract. 

Rules  of  Construction. 

33.  False  representation. 

34.  Employer's      statement      re- 

garding condition  of  em- 
ploye(>'s  accounts. 

35.  Illustration. 

3f>.     Further    reference  to   state- 
ments  as  to  examination 
of  accounts. 
3 


37.  False  warranty. 

38.  Leading  case. 

39.  Breach    of   promissory    war- 

ranty. 

40.  The    law   averse   to    forfeit- 

ures. 

41.  Doubtful      statements     con- 

strued as  representations. 

42.  The  Court  views  the  entire 

contract. 

43.  False  statements  by  risk  not 

binding  on  insured  unless 
ratified. 


E 

vamples  of  Representations 

and   Warranties. 

44. 

Digest  of  authorities. 

45. 

Same. 

46. 

Same. 

47. 

Same. 

48. 

Same. 

49. 

Same. 

.50. 

Same. 

51. 

Same. 

52. 

Same. 

u 


il\l:    l..\\\    <)l'    1-IUKM'lV     IIO.ND.S. 


r»y.     Aiitli(iril.\'    of    olliccr    of    cor-  ."»."».      Ri-incsciitjitidiis      :iimI      \v;ir- 

poralioii  ill  nuikiii^'  iijipli-  •          raiitics   in    iiisiiraiicc  iioii- 

catioii  for  fidelity  i)oii(l  <»f 

employee  tliereof.  ."»(■>.     Stiiteiiifuts     l)y     i»iii)lic     ofli- 

r>4.     I'm! her    relenMice    to    same  eers. 

siii)Ject. 


24. — The  Subject  of  Much  Conflict  and  Difficulty. 

The  iiitcri)rotati()n  of  r(j)resentations  and  warranties  in 
insurance  ])()licif's^  has  been  the  most  prolific  source  of  liti- 
gation, conflict  and  uncertainty  in  the  entire  insurance  field. 
Innumerable  attempts  ha^e  been  made  to  define  representa- 
tions and  warranties,  and  to  draw  the  distinctions  between 
them.  The  definitions,  varying  in  form,  but  similar  in  sub- 
stance, seem  to  state  the  rules  of  construction  with  reason- 


1.— Ill  i>assiiig  upon  any  ques- 
tion imolving  tlie  construction 
and  effect  of  representations  and 
warranties  in  insurance  con- 
tracts, it  must  be  borne  in  mind 
that  many  of  the  States  have 
enacted  statutes  providing  in 
si'l>stance  that  statements  in  ap- 
plications for  insurance  policies, 
made  in  good  faith,  shall  not 
operate  as  a  defense  to  a  suit  on 
a  policy  issued  thereupon,  even 
though  such  statement  be  untrtie 
and  its  truth  is  made  a  war- 
ranty, unless  such  statement  re- 
late to  some  matter  material  to 
the  risk.  Such  local  statutes, 
tlierefore.  where  applicable  m 
terms  or  by  judicial  construc- 
tion, control  the  construction  of 
a  contract  made  in  such  State. 

A  statute  in  force  in  the  State 
of  Maryland.  Art.  23.  sec.  196, 
Public    General    Laws,    such    as 


here  referred  to.  applicable  in 
terms  to  life  insurance  contracts 
has  been  held  applicable  also  to 
accident  policies.  (Md.  Casualty 
Co.  vs.  Gehrmann,  96  Md.  634.) 
Whether  it  will  be  held  applica- 
ble to  fidelity  contracts  has  not 
been  decided. 

A  somewhat  similar  statute  of 
the  State  of  Tennessee,  section 
3306.  Shannon's  Code,  referring 
to  "a  contract  or  policy  of  in- 
surance," has  been  held  applica- 
ble to  fidelity  bonds  (First  Nafl. 
Bank  vs.  Fidelity  &  Guaranty 
Co.,  110  Tenn.  10).  and  consti- 
tutional and  valid  under  the  po- 
lice power  of  the  State  (Insur- 
ance Co.  vs.  Whitaker.  112  Tenn. 
153),  and  to  refer  as  well  to 
warranties  as  representations. 
(Insurance  Co.  vs.  Statlings.  110 
Tenn.  1.) 


EEPEESENTATIONS    AND    WARRANTIES. 


35 


able  accuracy;  yet,  after  all  the  years  in  which  insurance  in 
its  various  forms  has  been  in  general  and  universal  use  in 
the  commercial  world,  and  after  the  authors  of  numerous 
works  on  the  law  of  insurance  have  devoted  a  large  part  of 
their  attention  to  this  particular  subject,  there  is  scarcely  a 
volume  of  reports  published,  that  does  not  contain  one  or 
many  decisions  relative  to  the  construction  of  this  feature  of 
insurance  contracts. 

The  difficulty  seems  to  be,  not  with  the  rules  of  interpre- 
tation or  definitions,  but  in  applying  the  rules  to  the  facts 
in  the  particular  case.  And  this  difficulty  is  greatly  in- 
creased by  the  plainly  apparent  determination  of  the  Courts 
in  many  cases  to  hold  the  insurer  liable,  not  in  accordance 
with  the  terms  of  the  policy,  but  in  spite  of  them.  The  basis 
of  this  assertion  will  fully  appear  in  the  conflicting  decisions 


A  similar  statute  of  tlie  Com- 
monweal tli  of  Kentucky,  Ken- 
tucky Statutes,  section  G39,  re- 
ferring to  statements  or  descrip- 
tions in  any  application  for  a 
policy  of  insurance,  held  appli- 
cable to  applications  for  corpor- 
ate fidelity  bonds,  but  misrepre- 
sentations material  to  the  risk  in 
that  character  of  cases,  whether 
fraudulent  or  not.  would  invali- 
date the  bond  (Warren  Deposit 
Bank  vs.  Fidelity  &  Deposit  Co., 
116  Ky.  38 ;  Fidelity  &  Guaranty 
Co.  of  N.  Y.  vs.  Western  Bank, 
29  Ky.,  L.  R.  639).  It  was  also 
held  that  under  this  statute  state- 
ments by  an  employer  in  an  ap- 
plication for  a  fiduciary  bond  for 
one  of  his  employees,  that  such 
employee's  position  would  ,  be 
merely  that  of  bookkeeper,  and 
that  the  largest  amount  of  cash 
nicely  to  be  in  his  custody  would 


be  but  a  few  dollars,  did  not 
amount  to  warranting  the  fact 
(Champion,  &c.,  vs.  American 
Bonding  Co.,  115  Ky.  SG3).  In 
construing  this  statute,  it  was 
held  by  the  highest  Court  of  Ken- 
tucky in  Insurance  Co.  vs.  Curry, 
13  Bush.  312,  that  it  was  not  its 
meaning  that  a  representation 
could  not  be  made  a  warranty 
by  the  express  contract  of  the 
parties,  and  when  this  had  been 
done,  the  statute  did  not  reach 
the  case ;  but  this  decision  was 
disapproved  and  distinctly  over- 
ruled subsequently  by  the  same 
Coiu't  in  Insurance  Co.  vs.  Rud- 
wig.  SO  Ky.  223,  and  that  deci- 
sion has  been  followed  in  all  the 
later  decisions  of  the  Court  of 
last  resort.  (Ins.  Co.  vs.  Kear- 
nan,  88  Ky.  468;  Ins.  Co.  vs. 
Wigginton,  89  Ky.  330;  Ins.  Co. 
vs.  Davies'  Excr'.s.,  87  Ky.  TAl.) 


30  TIM.    l.AW    Ol'    I'lDKLITY    BONDS. 

puiiitcd  uiit  in  this  work;  iiiid  purticularly  in  the  illustra- 
tions given  in  conneetion  with  tlic  discussion  of  the  question 
of  construction  of  corporate  fidelity  contracts  as  indemnify- 
ing contracts,  Chapter  1,  sees.  15-21  ante. 

DEFINITIONS. 
25. — Arnould's  Definition. 

A  representation  is  a  verbal  or  written  statement  made  by 
the  assured  to  the  underwriter  before  the  subscription  of 
the  policy  as  to  the  existence  of  some  fact  or  state  of  facts, 
tending  to  induce  the  underwriter  more  readily  to  assume 
the  risk,  by  diminishing  the  estimate  he  would  otherwise  have 
formed  of  it. 

An  express  warranty  in  the  law  of  insurance  is  a  stipula- 
tion inserted  in  writing  on  the  face  of  the  policy  on  the  lit- 
eral truth  or  fulfilment  of  which  the  validity  of  the  entire 
contract  depends. 

This  is  the  definition  given  by  Arnould  (Arn.  Ins.,  489, 
577)  w^hich,  says  May,  has  met  with  general  acceptance.  The 
latter  (May,  Ins.  4th  ed.,  304-362)  defines  a  warranty  and  a 
representation,  and  draws  the  distinction  between  them  as 
follows : 

26. — May's   Definition. 

"A  warranty  is  an  express  stipulation  on  the  face  of  the 
policy,  on  the  literal  truth  or  fulfillment  of  which  the 
validity  of  the  contract  depends.  It  has  the  force  of  a 
condition  precedent  and  must  be  strictly  and  literally  com- 
plied with,  whether  material  to  the  risk  or  not,  whether  the 
insured  believed  it  true  or  not,  or  the  agent  or  even  the  com- 
pany knew  it  was  false  at  the  time  of  insurance. 

"A  representation  is  a  statement  incidental  to  the  con- 
tract, and  on  the  faith  of  which  it  is  made. 


EEPBESENTATIOXS  AXD  WAREANTIES.  3T 

"Distinction  between  warranty  and  representation :  The 
first  is  put  into  the  policy  and  forms  part  of  the  contract, 
the  latter  is  not  a  part  of  the  contract,  but  forms  the  basis 
of  it,  or  is  collateral  to  it." 

27. — Kerr's  Definition. 

Kerr  on  Ins.   (Sees.  137.138)  gives  this  definition: 

"A  representation  is  a  stipulation,  assertion  or  statement 
relative  to  the  risk  assumed,  and  is  collateral  to  the  con- 
tract. It  is  sufficient  if  a  representation  be  substantially 
true,  or  substantially  complied  with.  Only  when  made  of 
and  concerning  a  fact  material  to  the  risk  can  the  falsity 
of  a  representation  be  asserted  to  defeat  recovery. 

"A  warranty  is  a  stipulation,  assertion  or  statement  of, 
or  related  to,  some  fact  connected  with  the  subject-matter 
of  the  insurance,  upon  the  literal  truth  of  which  the  valid- 
ity of  the  contract  depends,  without  regard  to  the  material- 
ity of  such  fact,  or  the  motive  which  prompted  such  stipula- 
tion^  assertion  or  statement. 

"A  warranty  must  be  literally  true,  without  regard  to 
its  materiality,  while  a  representation  must  be  true  only  so 
far  as  the  representation  is  material  to  the  risk." 

28. — Elliott's  Definition. 

Elliott  on  Ins.    (sees.    101,   102)    gives  the  definition  as 
follows : 

"A  statement  made  by  the  applicant  for  insurance  pend- 
ing the  negotiations  relative  to  some  fact  having  reference 
thereto,  and  upon  the  faith  of  which  the  contract  is  entered 
into,  is  called  a  representation. 

"When  a  representation  made  by  an  applicant  for  insur- 
ance is  carried  into  the  contract  and  made  a  part  thereof, 
it  becomes  a  warranty,  and  the  question  of  its  materiality 
is  thus  settled  by  the  contract  of  the  parties. 

"The  essential  difference  between  a  warranty  and  a  rep- 
resentation is  that  in  the  former  it  must  be  literally  ful- 


38  TJIK    I. AW    OK    FIDKLITV    BONDS. 

filled,  or  there  is  no  contract,  the  parties  having  stipulated 
that  the  subject  of  the  warranty  is  material  and  closed  all 
inquiry  concerning  it  while  in  the  latter,  if  the  representa- 
tion proves  to  be  untrue,  if  it  is  not  material  to  the  risk, 
the  contract  is  not  avoided." 

29. — Deductions  from  the  Authorities. 

In  editorial  notes  to  American  Decisions  (16  Am.  Dec, 
463;  40  Am.  Dec,  349;  54  Am.  Dec,  320),  the  following 
distinctions  are  deduced  from  the  authorities : 

"There  is  a  clear  and  well-settled  distinction  in  the  law 
of  insurance,  between  representations  and  warranties. 

"A  representation  is  not  a  part  of  the  contract,  but  is 
collateral  to  it. 

"A  warranty  is  a  part  of  the  contract.  It  is  in  the  nature 
of  a  condition  precedent,  and  must  be  strictly  fulfilled  in 
order  to  enable  the  insured  to  recover  on  the  policy.  If 
false  in  any  particular,  whether  the  error  materially  affects 
the  risk  or  not,  the  contract  is  broken. 

"The  warranty  itself  makes  the  thing  warranted  mate- 
rial. It  becomes  material  to  the  contract,  though  it  does  not 
affect  the  risk.  The  parties  having  agreed  upon  the  mate- 
riality of  the  thing  warranted,  their  agreement  precludes 
all  inquiry  on  the  subject." 

30. — Ellis'  Definition. 

Ellis  (Fire  and  Life  Ins.,  2S)  says: 

"A  warranty  being  in  the  nature  of  a  condition  prece- 
dent, it  is  quite  immaterial  for  what  purpose,  or  with  what 
view  it  is  made,  but  being  once  inserted  in  the  policy  it  be- 
comes a  binding  security  on  the  assured." 

31. — Leading  Case. 

The  leading  insurance  ease  upon  this  subject  is  Campbell 


REPRESENTATIONS  AND  WARRANTIES.  39 

VS.  Ins.  Co.,  98  Mass.  381^,  which  laid  down  the  following 

definition: 

"A  warranty,  in  insurance,  enters  into  and  forms  a  part 
of  the  contract  itself.  It  defines,  by  way  of  particular  stip- 
ulation, description,  condition  or  otherwise,  the  precise 
limits  of  the  obligation  which  the  insurers  undertake  to  as- 
sume. 1^0  liability  can  arise  except  within  those  limits. 
In  order  to  charge  the  insurers,  therefore,  every  one  of  the 
terms  which  define  their  obligation  must  be  satisfied  by  the 
facts  which  appear  in  proof.  From  the  very  nature  of  the 
case,  the  party  seeking  his  indemnity,  or  payment  under  the 
contract,  must  bring  his  claim  within  the  provisions  of  the 
instrument  he  is  undertaking  to  enforce.  The  burden  of 
proof  is  upon  the  plaintiff  to  present  a  case  in  all  respects 
conforming  to  the  terms  under  which  the  risk  was  assumed. 
It  must  be  not  merely  a  substantial  conformity,  but  exact 
and  literal;  not  only  in  material  particulars,  but  in  those 
that  are  immaterial  as  well. 

"A  representation  is,  on  the  other  hand,  in  its  nature,  no 
part  of  the  contract  of  insurance.  Its  relations  to  the  con- 
tract is  usually  described  by  the  tei-m  'collateral.'  It  may 
be  proved,  although  existing  only  in  parol  and  preceding 
the  written  instrument.  In  considering  the  question  whether 
a  statement  forming  a  part  of  the  contract  is  a  warranty,  it 
must  be  borne  in  mind,  as  an  'established  maxim,  that  war- 
ranties are  not  to  be  created  nor  extended  by  construction. 
They  must  arise,  if  at  all,  from  the  fair  interpretation  and 
clear  intendment  of  the  words  used  by  the  parties." 

32. — Burden  of  Proof  of  Representation  or  Warranty  in  Corporate 
Fidelity   Contract. 

The  rule  as  here  stated  by  the  Su])reme  <Tudicial  Court  of 
Massachusetts  placing  the  burden  of  proof  upon  the  assured 
is  not  applicable  to  corporate  fidelity  bonds-.     In  suits  upon 

]. — See  Chapter  1,  sec.  r*.  ante. 

2. — See    Chapter   25,    sec.    184,  post. 


40  rilK    I, AW    oi'    IIDKLITV     HONDS. 

llic  laiicr,  tile  liiii-(lcii  rests  u|)nii  tlic  (IctViKlanL  lo  show  the 
hrcMcli  of  llic  waiTiiiit V  ii|h.ii  which  he  relies  as  discharging 
him  (Vdiii  liis  (il)lii;ati<iii  iiiihss,  of  course,  such  breadi  should 
alliniiatively  appear  from  the  plaintiif's  case. 

American  Cred.  Ind.  Co.  vs.  Wood,  To  h'ed.  81. 

Goldman  vs.  Fidelity  k  Deposit  Co.,  125  Wis. 
390. 

Ins.  Co.  vs.  Gridley.  100  V.  S.  614. 

Sinclair  &  Co.  vs.  Xatl.  Surety  Co.,  13  Iowa, 
549. 

Tlio  crucial  distinction  between  a  representation  and  a 
warranty  is  that  the  one  is  not,  and  the  other  is,  a  part 
of  the  contract  between  the  parties,  and  that  the  truth  of 
the  one  is  not,  and  the  truth  of  the  other  is,  a  condition 
precedent  to  a  recovery  upon  the  policy  or  bond  to  which 
they  relate. 

Eice  vs.  Fidelity  c^-  Deposit  Co.,  103  Fed.  427. 

A  warranty  in  an  ai)i)lication  for  insurance  must  be  lit- 
erally and  exactly  fulfilled,  but  a  representation  is  satis- 
fied if  it  is  substantially  true ;  and  a  slight  variance,  which 
would  not  have  influenced  the  action  of  the  insurer  in  mak- 
ing the  contract,  will  not  defeat  the  policy. 

Carrollton  Furniture  Mfg.  Co.  vs.  Am.  Cred.   Ind. 
Co.,  124  Fed.  25. 


RULES  OF  CONSTRUCTION. 

.33. — False  Representation. 

A  false  re]nvs(  ntation  of  an  imnnUerial  fact  nuide  by  an 
employer  in  an  a]>])lieation  for  a  eorjKU'ate  fidelity  bond  will 
not  prevent  a  n'covery  under  the  b(^nd.  This  proposition  is 
well  settled. 


KEPEESENTATIONS  AND  WAEEANTIES.  41 

Whether  a  false  representation  of  a  material  fact  will  pre- 
vent a  recovery  depends  upon  the  circumstances  of  the  par- 
ticular case,  the  importance  of  the  representation  in  its  rela- 
tion to  the  subject-matter  of  the  contract,  and  especially 
whether  the  representation,  although  false,  is  made  in  good 
faith  without  knowledge  of  its  falsity,  and  with  no  intent  to 
mislead  or  deceive,  or  is  wilfully  and  fraudulently  made. 
While  a  false  representation  of  a  material  fact  leading  to  the 
execution  of  a  contract,  and  being  a  part  of  the  inducement 
thereto,  will,  under  the  rules  of  contract  law,  render  the  con- 
tract void,  in  insurance  contracts,  a  different  rule  prevails. 
It  seems,  from  the  authorities,  there  must  be  something  more 
than  the  mere  falsity  of  the  representation.  There  must  be 
some  element  of  culpable  negligence  in  making  the  repre- 
sentation without  the  knowledge  of  or  belief  in  its  truth,  or 
the  wilful  making  of  a  representation  with  knowledge  of  its 
falsity,  or  the  making  of  a  false  representation  with  the 
fraudulent  intent  to  deceive.  It  is  frequently  stated  by  the 
text  writers  and  in  the  decisions  of  the  Courts  that  a  false 
statement  which  is  a  mere  representation  will  not  defeat  a  re- 
co^'ery  under  the  policy.  This  proposition  is  subject,  how- 
ever, to  the  qualification  here  shown.  That  a  false  and  fraud- 
ulent inducement  to  the  execution  of  a  contract  of  insurance 
or  otherwise  will  avoid  the  contract,  whatever  such  induce- 
ment may  be  called,  is  too  well  settled  to  be  open  to  question. 
In  such  case  it  is  immaterial  whether  the  statement  is  war- 
ranted to  be  true  or  not. 

34. — Employer's    Statement    Regarding    Condition    of    Employee's 
Accounts. 

In  litigation  under  corporate  fidelity  bonds,  the  question 
frequently  arises  as  to  whether  a  statement  by  the  employer 
that  the  accounts  of  the  employee  have  been  examined  and 


42  rill':  law  of  fidklitv  bonds. 

have  bt'C'ii  I'uunJ  correct  is  inulcrial  and  wliellicr  ihc  lalsity 
of  such  statement  will  defeat  a  recovery. 

A  review  of  the  authorities  will  show  that  the  following 
])rinciples  of  construction  a])i)ly:  That  if  no  examination  has 
been  made,  and  a  default  is  subsequently  found  to  have  then 
existed,  there  can  be  no  recovery,  whether  the  statement  was 
a  warranty  or  a  representation,  it  being  in  either  case  a 
wilful  and  false  statement  of  a  fact  material  to  the  contract^ 
that  if  the  statement  is  not  expressly  warranted  to  be  true, 
and  is  made  in  good  faith,  with  belief  in  its  tinath,  and  a 
proper  examination  has  been  made,  and  no  default  discov- 
ered, though  it  then  existed,  such  statement  will  not  prevent 
a  recovery;  that  if  such  statement  is  expressly  warranted  to 
be  true,  its  falsity  either  as  to  the  fact  of  examination  or  of 
the  existence  of  default  will  defeat  the  policy. 

Monongahela   Coal   Co.   vs.   Fidelity  Sz  Deposit 

Co.,  94  Fed.  732. 
Model  Mill  Co.  vs.  Fidelity  &  Deposit  Co.,   1 

Tenn.  Ch.  App.  365. 
Bank  of  Tarboro  vs.  Fidelity  &  Deposit  Co.,  12G 

N.  C.  320. 
United    States    Fidelity    &    Guaranty    Co.    vs. 
Blackly,  Hurst  &  Co.,  25  Ky.  L.  R.  1271. 
American  Bonding  Co.  vs.  Burke,  85  Pac.  (Col.) 

692. 
Carstairs  vs.  Am,  Bonding  Co.,  116  Fed.  449. 

The  latter  proposition  is  unquestionably  theoretically  and 
legally  sound,  and  supported  by  the  weight  of  authority.  In 
practice,  however,  it  is  open  to  some  quosti(^n,  in  view  of 
the  disposition  of  the  Courts  in  some  instances,  in  order  to 
avoid  or  evade  the  effect  of  the  warranty,  to  look  into  the 
circumstances  of  the  examination,  and  the  possibility  of  the 
detection  of  defaults  therebv.     Where  it  can  be  shown  that 


BEPEESENTATIONS  A:VD  WAREANIIES.  43 

a  careful  examination  made  by  persons  qualified  to  make  it 
has  failed  to  disclose  cleverly  concealed  defaults,  there  is  a 
tendency,  based  upon  equitable  grounds,  to  give  effect  to  the 
bond. 

35. — Illustration. 

Thus  it  was  said  in  the  very  recent  case  of  United  States 
Fidelity  &  Guaranty  Company  vs.  First  National  Bank  of 
Dundee,  233  111.  475 :  "If  bank  officers  are  to  be  held  to  such 
a  rigid  method  of  examination  and  supervision  over  the  ac- 
counts of  their  employees,  there  would  be  little  necessity,  if 
any,  for  purchasing  fidelity  insurance."  In  this  case,  at  the 
time  of  the  renewal  of  a  bank  cashier's  bond  there  was  one 
irregularity  in  his  books  for  the  preceding  year,  consisting 
of  an  additional  cipher  being  placed  after  the  figures  "300." 
The  Court  held  the  failure  to  discover  such  irregularity  and 
the  certification  by  the  bank  that  the  accounts  were  correct, 
under  a  stipulation  that  the  books  were  examined  from  time 
to  time  in  the  regular  course  of  businesss,  did  not  invalidate 
the  bond.  The  Court  further  said  that  a  statement  in  a  re- 
newal certificate  that  the  books  and  accounts  of  the  cashier 
were  examined  by  the  bank  from  time  to  time  in  the  regular 
course  of  business  and  found  to  be  correct,  does  not  mean  that 
such  an  exhaustive  examination  was  made  as  would  neces- 
sarily discover  the  slightest  irregularity  that  might  exist, 
however  cunningly  covered  up. 

Legal  verbiage  aside,  this  case  shows  there  was  a  certifi- 
cate by  a  bank  that  the  books  of  its  cashier  had  been  examined 
and  found  correct  upon  which  statement  the  bond  was  is- 
sued ;  that  there  existed  at  that  time  an  irregularity  in  said 
accounts  amounting  to  the  difference  between  $300  and 
$3,000  and  that  notwithstanding  these  facts  judgment  was 
awarded  against  the  surety  for  the  penalty  of  its  bond.  The 
Court  laid  great  stress  on  the  fact  that  an  examination  had 


44  IHE    J.AW    OJ"    FIDKHTV    BONDS. 

bt'Oii  made,  and  overlookod  or  igiionid  the  allegation  that  the 
accounts  had  been  found  correct. 

36. — Further  Reference  to  Statements  as  to  Examination  of  Ac- 
counts. 

In  an  early  case  it  was  said : 

"An  employer  would  need  no  insurance  against  that  close 
and  relentless  vigilance  Avliich  makes  stealing  impossible." 
Guarantee  Co.  vs.  Mechanics'  Bank,  80  ¥ed.  766. 

With  regard  to  the  knowledge  on  the  part  of  the  employer 
or  obligee  ui)on  which  re])resentations  may  be  made,  refer- 
ence is  suggested  to  the  law  as  laid  down  by  Lawson  on  Con- 
tracts, sec.  238: 

"Where  persons  take  it  upon  themselves  to  make  asser- 
tions as  to  which  they  are  ignorant,  whether  they  are  true 
or  untrue,  they  are  as  responsible  as  if  they  had  asserted 
tliat  which  they  kncAv  to  be  untrue.  Whether  a  party  mis- 
representing a  fact  knew  it  to  be  false,  or  made  the  asser- 
tion without  knowing  whether  it  was  true  or  false,  is  wholly 
immaterial.  For  the  affirmation  of  what  he  does  not  know 
or  believes  to  be  true  is  as  unjustifiahle  as  the  affirmation 
of  what  is  known  to  be  false,  and  the  same  is  true  where 
the  party  is  negligent,  or  ought  to  have  known  or  remem- 
bered the  truth  and  did  not." 

37. — False  Warranty. 

.V  false  warranty  of  an  immaterial  fact  will,  theoretically, 
and  in  accordance  with  the  very  nature  of  a  warranty,  pre- 
vent a  recovery  under  a  contract,  since  the  parties  have,  by 
warranting  the  the  fact  to  he  true,  made  it  material.  luit. 
practically,  in  this  instance,  as  in  that  referred  to  above,  the 
Courts  are  disposed  to  look  to  substance  rather  than  form, 
and  enforce  the  contract  without  giving  too  nice  attention  to 
technicalities. 


REPRESENTATIONS    AND   WARBANTIES.  45 

38, — Leading  Case. 

Referring  to  materiality  of  questions  and  answers  in  ap- 
plication for  a  life  insurance  policy,  the  Supreme  Court  in 
the  leading  case  of  Jeffries  v.  Ins.  Co.,  22  Wall.  47,  says: 
"The  juror  may  be  right,  and  the  Company  may  be  wrong, 
but  the  Company  has  expressly  provided  that  their  judg- 
ment, and  not  the  judgment  of  the  juror,  shall  govern.  Their 
right  thus  to  contract,  and  the  duty  of  the  Court  to  give  effect 
to  such  contracts,  cannot  be  denied." 

In  National  Surety  Co.  vs.  Long,  125  Fed.  887,  it  was 
held: 

"The  care  or  negligence  with  which  an  obligor  who  failed 
sought  to  perform  his  contract  is  no  defense  to  an  action 
for  its  breach.     The  only  test  of  the  right  to  recover  is  the 
.  existence  of  the  breach  of  the  covenant  upon  which  the  exe- 
cution is  based. 

"The  immateriality  of  a  warranty  or  of  a  condition  prec- 
edent made  by  the  agreement  of  the  parties,  and  the  innoc- 
uousness  of  a  failure  to  perforin  it,  do  not  nullify  or  miti- 
gate the  fatal  effect  of  such  a  failure  prescribed  by  their 
agreement." 

39. — Breach  of  Promissory  Warranty. 

That  a  false  warranty  of  a  material  fact  will  render  the 
contract  void  is  fundamental  law.  The  warranty  may  relate 
to  existing  facts,  such  as,  that  the  accounts  of  the  risk  have 
been  examined ;  that  they  are  correct ;  that  there  is  no  short- 
age ;  that  he  is  not  indebted,  and  the  like ;  qy  the  warranty 
may  relate  to  a  course  of  future  action  to  be  observed  by  the 
obligee,  such  as  the  provision  for  due  supervision  over  the 
risk,  periodical  examination  of  his  accounts,  countersigiia- 
ture  on  checks,  and  similar  precautionary  measures.  The 
breach  of  such  a  promissory  warranty,  especially  where  it 
relates  to  specific  covenants  by  the  obligee  will,  as  in  the 


4{> 


IIIK    LAW    OK    MDKLITY    BONDS. 


case  uf  warranty  of  an  existing-  fact,  prevent  a  ret^oveiy  under 
the  contract. 

Hunt  vs.  Fidelity  &  Cas.  Co.,  90  Fed.  242. 
Rice  vs.  Fidelity  <Sr  Deposit  Co.,  10:3  Fed.  427. 
Young  vs.  Pacific  Sur.  Co.,  137  Calif.  r>I)0. 
Weider  vs.  Union  Sur.  k  Guar.  Co.,  86  N.  Y. 

Supp.  964. 
Phenix   Ins.   Co.   vs.   Guarantee  Co.,    115   Fed. 

964. 
But  see — Aetna  Ind.  Co.  vs.  J.  R.  Crowe  Coal  t^'  Alining 

Co.,  154  Fed.  545. 

40. — The  Law  Averse  to  Forfeitures. 

The  policy  of  the  law  is  averse  to  forfeitures.  It  seeks  in 
all  instances  to  give  effect  to  the  contract,  and  where  there  is 
doubt  whether  statements  made  by  the  insured  are  to  be  con- 
sidered as  warranties,  and  consequently  a  vital  part  of  the 
contract,  or  mere  representations  of  facts  and  not  a  guarantee 
of  their  truth,  the  law  will  treat  such  statements  as  repre- 
sentations. This  is  settled  beyond  question  as  will  fully  ap- 
pear in  the  authorities  cited  hereafter  in  this  chapter.  In 
this  connection  it  is  to  be  borne  in  mind  that  the  word  "war- 
ranty'" is  not  necessary  to  create  a  warranty  in  law.  nor 
does  the  use  of  that  word  necessarily  create  a  warranty. 

Frost,  Guar.  Ins.,  Sec.  60. 

Livingston  vs.  Fidelity  &:  Deposit  Co.,  81  X.  E. 
(Ohio)  330. 

North  Am.  Accident  Ins.  Co.  vs.  Rehacek,  123 
111.  App.  219. 

Court  of  Honor  vs.  Clark,  125  111.  App.  490. 

Max  J.  Winkler  Brokerage  Co.  vs.   Fidelity  6: 
Deposit  Co.,  44  S.  R.  449. 

Moulor  vs.  Ins.  Co.,  Ill  U.  S.  335. 


KEPRESEJSTTATIONS    AND    WARRANTIES.  47 

41. — Doubtful  Statements  Construed  as  Representations. 

It  has  been  held  that  the  Courts  will  not  regard  any  state- 
ments made  by  the  insured  as  a  warranty,  unless  such  was 
the  obvious  purpose  of  the  parties  to  the  contract.  Missouri 
K.  &  T.  Trust  Co.  vs.  German  Bank,  77  Fed.  109.  At  least 
one  case  has  gone  to  the  extent  of  holding  that  statements 
will  not  be  treated  as  warranties,  unless  the  language  used 
is  not  capable  of  any  other  interpretation. 

Guthrie  'Nat.  Bank  vs.  Fidelity  &  Deposit  Co., 
14  Okla.  6.36. 

This  decision,  however,  is  not  supported  by  authority. 

42. — The  Court  Views  the  Entire  Contract. 

Where,  in  an  application  for  a  corporate  fidelity  bond,  one 
question  is  answered  without  qualification,  and  another  is 
answered  to  the  best  of  the  knowledge  and  belief  of  the  ap- 
plicant, there  is  some  disposition  on  the  part  of  the  Courts 
to  hold  that  the  qualification  in  the  one  answer  also  applies 
I0  the  other. 

On  the  other  hand,  it  has  been  held  that  a  declaration  that 
certain  facts  are  true  "to  the  best  of  the  knowledge  and  be- 
lief" of  the  assured  does  not  qualify  the  effect  of  an  answer 
that  assured  will  observe  certain  designated  supervision  over 
the  accounts  of  the  risk. 

Hunt  vs.  Fidelity  &  Cas.  Co.,  99  Fed.  242. 

In  order  to  arrive  at  the  true  meaning,  the  Court  takes  the 
instrument  by  the  four  comers,  so  to  speak.  Indeed,  in 
some  of  the  more  radical  decisions,  a  disposition  has  been 
shown  to  read  into  unequivocal  statements  the  implied  quali- 
fication that  they  are  made  to  the  best  of  the  knowledge  and 
belief  of  the  person  making  them. 


48  IllK    J-A\V    Ul     IIDLIAIY     BONDS. 

It  is  perliaj)s  uniieccssary  to  state  dial  llinjugbuiit  this 
discussion  the  stateiiicnts  referred  to  are  those  of  the  pros- 
|ic('tive  ()l»lii;(H',  aud  usually  made  in  the  fonn  of  an  cinploy- 
er's  dcelai'ation  in  answer  to  questions  projiduntlcd  by  the 
surety. 

43. — False    Statements    by    Risk   Not    Binding   on    Insured    Unless 
Ratified. 

False  statements  by  the  party  whose  fidelity  is  to  be  in- 
sured do  not  affect  llic  xalidily  of  ilic  contracT,  uidess  they 
are  ratified  by  the  obligee  with  knowledge  of  their  falsity. 

Imperial  Building  &:  Loan  Co.  vs.  Ignited  States 
Fidelity  tV:  Guaranty  Co.,  3  Ohio  Cir.  Ct.,  n. 
s.  385. 
See  also — 

U.  S.  Life  Ins.  Co.  vs.  Smith,  92  Fed.  503. 
Ludekens  vs.  Pscherhofer,  70  Hun.  ( X.  Y.  i  'lA^^. 


EXAMPLES  OF  REPRESENTATIONS  AND  WARRANTIES. 

44. — Digest   of   Authorities. 

In  view  of  the  varying  phraseology  employed  in  corjioi-at.* 
fidelity  bonds;  and  in  view  of  the  variety  of  circumstances 
under  which  claims  may  arise,  as  well  as  the  conflict  in  the 
decisions,  any  exact  classification  of  the  cases  is  impossible. 
A  synopsis  of  all  the  important  cases  is  given  below.  Re- 
ferring thereto,  applying  the  principles  of  construction  set 
out  above,  and  bearing  in  mind  the  decisions  in  the  ]>articular 
State  or  Court,  the  law  may  be  readily  applied  to  any  given 
case. 

In  a  suit  upon  the  corporate  fidelity  bond  of  a  bank 
teller,  a  plea  alleged  that  the  guaranty  company  was  in- 
duced to  execute  the  bond  by  the  positive  representation  in 


liEPEESENTATIOA'8  AND  WARRANTIES.  49 

writing,  made  to  it  for  and  on  behalf  of  the  hank  by  its 
cashier,  that  the  teller  was  never  in  arrears  or  default  to 
the  bank ;  that  his  books  and  accounts,  including  cash,  se- 
curities and  vouchers,  were  last  examined  a  short  time  be- 
fore, and  found  to  be  correct,  and  that  but  for  these  repre- 
sentations it  would  not  have  executed  the  bond.  The  plea 
further  avers  that  these  representations  were  false ;  that 
the  teller  was  at  the  time'  of  these  representations,  and 
had  been  long  prior  thereto,  a  defaulter,  and  largely  in  ar- 
rears to  the  bank,  and  that  the  examination  which  was 
represented  to  have  been  made  was  not  so  made,  and  that 
if  it  had  been  made,  his  defalcation  would  have  been  dis- 
covered. 

The  Supreme  Court  of  Appeals  of  Virginia  said : 

"These  alleged  representations  were  of  existing  facts^ 
were  material,  and  presumably  within  the  peculiar  knowl- 
edge of  the  bank  and  its  ofHcers,  and  constituted  an  induce- 
ment to  the  guarantee  company  on  which  it  had  the  right 
to  rely  to  execute  the  bond.  It  was  immaterial  whether  the 
plaintiff  knew  they  were  false,  or  honestly  believed  them  to 
be  true.  If  a  party  innocently  misrepresents  a  material 
fact  by  mistake,  the  effect  is  the  same  on  the  party  who  is 
misled  by  it  as  if  he  who  innocently  made  the  misrepre- 
sentation knew  it  to  be  positively  false.  The  real  question 
in  such  a  case  is  not  what  the  party  making  the  representa- 
tion knew  or  believed,  but  was  the  representation  false  and 
the  other  party  misled  by  it.  The  defense  presented  by  this 
plea  was  a  valid  one  if  proved." 

Guarantee   Co.   of  JST.   A.   vs.    First   Nat.    Bank   of 
Lynchburg,  9,5  Va.  480. 

A  fidelity  bond  issued  to  an  employer  to  indemnify  it 
against  loss  through  any  defalcation  of  its  manager  pro- 
vided that  certain  statements  made  by  the  employer  rela- 
tive to  the  duties  and  accounts  of  the  employed,  "together 
with  any  statements  or  declarations  hereafter  required  by, 
4 


50  'IIIK    I, AW    (>|-    l'II)i;i,I TV     IIOND.S. 

ov  ludgi'd  uitli,  tlif  coiiipmiy,  do  and  .sliall  con.stitute  au 
essential  i)art  and  tonn  tlie  basis  of  this  contract."  It 
f'urtluM  jn-ovidcd  that  "any  niafci-ial  misstatement  or  sup- 
pression (d"  fact  \>y  the  cnipluye'r  in  any  statement  or  dec- 
laration lo  tlic  coniiiany"  should  render  the  bond  void. 
On  the  occasion  of  an  annual  renewal  of  the  bond,  the 
treasurer  of  the  employer,  on  its  behalf,  made  a  certificate 
to  the  company  in  which  he  stated  that  on  December  23d 
the  books  and  accounts  of  the  employed  "were  examined 
by  us,  and  we  found  them  correct  in  every  respect,  and  all 
moneys  handled  by  him  accounted  for,  to  the  best  of  our 
knowledge  and  belief."  The  funds  of  the  employer  were 
kept  in  bank,  from  which  they  were  drawn  only  on  checks 
signed  by  the  manager;  and  he  drew  such  checks  in  pay- 
ment of  his  own  salary.  A  bookkeeper  was  employed  who 
made  out  monthly  statements  of  account  which  were  sub- 
mitted to  the  managing  board;  but  such  statements  gen- 
erally purported  to  show  only  current  receipts  and  dis- 
bursements, and  did  itot  show  the  condition  of  the  bank 
account  or  of  the  manager's.  In  fact,  at  the  time  the  cer- 
tificate was  made  to  the  bonding  company,  no  examination 
of  the  manager's  account  had  been  made  since  the  annual 
examination  in  the  preceding  February,  and  on  December 
23rd  he  had  drawn  out,  for  his  owti  use,  $3,700  in  excess 
of  his  salarj',  which  sums  had  been  debited  to  his  account 
by  the  bookkeeper.  During  the  ensuing  year  he  became  a 
defaulter  for  a  large  amount.  Held,  that  the  certificate  of 
the  treasurer  was  a  material  misstatement  of  fact,  which, 
by  the  plain  terms  of  the  contract,  rendered  the  bond  void. 
Carstairs  vs.  Am.  Bond.  Co.,  116  Fed.  449. 

The  board  of  directors  of  plaintiff  corporation,  whose 
meetings  were  held  in  ISTew  York,  passed  a  resolution  re- 
quiring the  general  manager  and  the  assistant  treasurer, 
both  of  whom  were  in  the  State  of  "Washington,  where  the 
business  of  the  company  was  conducted,  to  procure  surety 
bonds  at  the  expense  of  the  company,  and  they  were  so 


KEPKESENTATIONS  AND  WAEKANTIES.  51 

procured;  tliat  of  the  assistant  treasurer  being  issued  on  a 
statement  signed  in  the  name  of  the  company  by  the  gen- 
eral manager  as  such,  and  which  was  referred  to  in  the 
bond  as  having  been  furnished  by  plaintiff,  and  as  one  of 
the  inducements  for  the  execution  of  the  bond.  At  the 
expiration  of  the  term,  requests  for  further  statements  or 
certificates  from  the  employer  were  sent  to  the  officers  in- 
sured, which  were  filled  out  by  the  auditor  of  the  com- 
pany in  its  name  and  returned,  on  which  renewal  certifi- 
cates were  issued.  The  auditor's  certifi.cate  that  the  ac- 
count of  the  assistant  treasurer  had  been  examined  each 
month  and  fomid  correct,  etc.,  was  in  fact  untrue. 

Held,  in  an  action  against  the  surety  company  to  recover 
for  a  defalcation  of  the  assistant  treasurer,  that  the  audi- 
tor's certificate  was  properly  admitted  in  evidence,  and 
the  jury  were  correctly  charged  that  if  the  fact  of  its  execu- 
tion was  known  to  the  general  manager,  who  was  in  charge 
of  plaintiff's  business,  of  which  there  was  evidence,  it  was 
binding  on  the  plaintiff,  although  the  auditor  may  not  have 
been  authorized,  by  virtue  of  his  official  position,  to  make 
the  same,  plaintiff"  being  chargeable  with  notice  from  the 
recitals  therein  that  the  original  bond  was  issued  upon  a 
statement  made  in  its  behalf,  and  bound  to  know  on  what 
representations  the  renewals  were  made. 

If  in  fact  an  officer  of  a  corporation  whose  fidelity  is  in- 
sured sustained  other  relations  to  the  company  than  those 
indicated  in  its  statement  on  which  the  bond  was  executed, 
and  which  were  essentially  different,  and  involved  the  re- 
ceipt and  expenditure  of  the  employer's  money,  the  failure 
to  disclose  such  relations  is  a  defense  to  liability  of  the 
surety  company  on  its  bond. 

Issaquah  Coal  Co.  vs.  United  States  Fidelity  <Sr  Guar- 
anty Co.,  126  Fed.  89. 

45. — Same. 

A  declaration  that  the  answers  in  an  application  for  in- 
surance against  embezzlement  by  agent  are  true  "to   the 


IIIK    l-AW    Ol'     MDKLITV    IJONDS. 

best  of  the  knowledge  and  belief  of  assured  docs  not  qual- 
ify the  effect  of  the  answer  that  assured  will  make  monthly 
comparison  and  verification  of  cash  in  agent's  hands  with 
his  accounts  and  vouchers. 

A  promise  of  assured  to  make  monthly  comparison  of 
money  in  its  agent's  hands  with  his  accounts  and  vouchers 
is  a  warranty,  and  is  not  fulfilled  by  a  monthly  comparison 
of  the  checks  sent  it  by  him  by  the  accounts  and  vouchers 
sent  by  him  two  months  before. 

It  is  quite  immaterial  that  the  statement  (providing 
for  an  examination  of  the  cash  and  accounts  in  the  hands 
of  the  risk)  is  not  called  a  warranty.  It  is  a  stipulation 
embodied  in  the  contract,  by  the  words  of  the  policy,  for 
the  performance  of  future  acts,  and,  as  such,  is  an  express 
warranty. 

Where  a  written  contract  of  insurance  against  loss  by 
embezzlement  of  assured's  agent  contained  a  plain  provi- 
sion for  monthly  comparison  of  money  in  agent's  hands 
with  his  accounts  and  vouchers,  it  cannot  be  shown  that 
it  is  not  the  custom  of  companies  engaged  in  the  same 
business  as  assured  to  go  .to  an  agent's  office  and  examine 
his  accounts,  bank  books,  and  cash,  but  that  it  was  cus- 
tomary to  examine  his  statements  and  vouchers,  and  com- 
pare them  with  his  remittances. 

Hunt  vs.  Fidelity  &  Casualty  Co.,  99  Fed.  242. 

Where  a  corporate  fidelity  bond  provided  that  certain 
statements  or  declarations  filed  A\'ith  the  company  by  the 
employer  relative  to  the  duties  and  accounts  of  the  ena- 
ployee  should  constitute  an  essential  part  and  form  the 
basis  of  the  contract,  and  should  be  conditions  precedent  to 
the  right  of  recovery,  and  a  statement  was  filed  in  which 
it  was  declared  that  the  books  and  accounts  of  such  agent 
had  been  examined  and  found  correct  and  all  moneys 
handled  by  him  accounted  for,  in  a  suit  on  the  bond  it 
Avas  shown  the  books  had  not,  in  fact,  been  examined.  The 
trial  Court,  on  request,  instructed  the  jury  to  find  for  the 


EEPEESENTATIONS  AND  WARRA:^TIES. 


53 


defendant.  Upon  appeal  by  the  plaintiff,  alleging  said  in- 
struction as  error,  the  instruction  was  approved  and  the 
case  affirmed. 

The  trial  Court  said : 

"The  certificate  must  be  taken  as  true,  as  far  as  this 
surety  company  has  a  right  to  take  it,  as  to  them,  whether 
as  a  matter  of  fact  it  was  false  to  the  president  of  the  em- 
ployer or  not.  There  was  nothing  done  by  the  surety  com- 
pany to  mislead  the  president  into  giving  this  certificate. 
The  enclosing  the  blank  was  a  mei'e  form,  but  it  was  essen- 
tial that  he  should  give  the  certificate,  if  he  expected  the 
renewal  of  the  contract  of  indemnity.  Therefore  he  chose 
to  give  it.  It  may  have  been  false  that  they  never  exam- 
ined the  books,  but  the  indemnity  company  had  a  right  to 
take  the  fact  stated  as  true  *  *  *  The  president  could  have 
declined  to  send  the  certificate,  or  that  he  would  not  send 
it,  because  he  had  not  examined  the  books,  but  when  he  did 
say  that  he  examined  the  books  and  found  them  correct, 
the  indemnity  company  had  a  right  to  take  that  fact  to  be 
true,  and  did  take  it  for  true,  and  acted  upon  it.  Unques- 
tionably, as  between  these  contracting  parties,  the  presi- 
dent is  estopped  from  denying  that  certificate  in  law  *  *  * 
The  inducement  to  the  surety  company  to  enter  into  the 
second  contract  was  a  false  inducement.  I  think  there  must 
be  a  verdict  for  the  indemnity  company." 

Monongahela  Coal  Co.  vs.  Fidelity  &  Deposit  Co., 
94  Fed.  732. 

A  written  statement  made  by  employers  to  the  obligor 
in  a  bond  of  indemnity  against  the  dishonest  acts  of  their 
employee,  to  the  effect  that  they  will  invariably  apply  cer- 
tain checks  to  his  action,  which  the  parties  expressly  agree 
by  the  statement  itself  and  by  the  bond  shall  be  the  basis 
of  the  latter,  and  a  condition  precedent  to  a  recovery  upon 
it,  is  of  the  nature  of  a  warranty,  and  not  of  a  representa- 


54  'J'JIl':    LAW    OK    I'lDIOMTV    1{()M>.S. 

tion,  ;iiid  a  failure  to  comply  witli  the  promise  it  contains 
is  fatal  to  an  action  upon  the  bond. 

Kice  vs.  Fidelity  &  Deposit  Co.,  103  Fed.  427. 

Answers  by  au  ai)|tlicant  foi-  an  indf-niiiity  bond,  to 
the  eflFect  that  he  had  never  applied  to  another  company 
for  bond  and  had  never  been  refused  bond  by  another  com- 
pany, are  material  and  valid;  and  where  such  answers  are 
false,  and  the  party  for  whose  benefit  the  bond  was  exe- 
cuted had  knoAvledge  of  this  falsity,  the  bond  is  rendered 
invalid. 

Imperial  Bldg.  &  Loan  Co.  vs.  United  States  Fidel- 
ity &  Guaranty  Company,  3  Ohio  Cir.  Ct.,  n.  s. 
385. 

46. — Same. 

An  answer  in  an  action  on  a  contract  of  indemnity  given 
to  secure  plaintiff  bank  against  the  fraudulent  acts  of  its 
cashier,  alleging  that  defendant  was  induced  to  renew  the 
bond  by  plaintiff's  statement  that  the  books  and  accounts 
of  its  cashier  had  been  examined  and  found  correct,  and 
all  moneys  handled  by  him  had  been  accounted  for.  and 
that  such  statement  was  false,  states  a  plea  in  bar. 

Bank  of  Tarboro  vs.  Fidelity  &  Deposit  Co.,  126 
K  C.  320. 

Recovery  cannot  be  had  on  a  bond  insuring  against  loss 
by  the  dishonesty  of  an  employee,  where  it  is  expressly  stip- 
ulated both  in  the  bond  and  in  the  application  therefor, 
that  answers  to  questions  in  the  application  for  said 
bond  are  to  be  "taken  as  conditions  precedent  and  as  the 
basis  of  the  bond  applied  for,"  and  answers  to  questions 
on  material  matters  contained  therein  are  untrue,  though 
not  known  to  the  applicant  to  be  untrue,  and  there  is  no 
bad  faith  on  the  part  of  said  applicant.  In  this  case  the 
employer's  statement  submitted  to  the  surety  upon  the  faith 
of  which  the  bond  was  issued,  represented  that  the  accounts 


KEPEESENTATIONS  AND   WARRANTIES.  55 

of  the  employee-had  been  examined  and  found  correct,  that 
he  was  not  short  with  his  employer,  and  that  he  was  not 
indebted  to  his  employer;  whereas  his  accounts  had  not 
been  examined,  he  was  short  in  his  accounts,  and  he  was 
indebted  to  his  employer  in  a  large  sum. 

Model  Mill  Co.  vs.  Fidelity  &  Deposit  Co.,  1  Tenn. 
Ch.  App.  365. 

Statements  made  by  an  employer  in  support  of  his  em- 
ployee's api^lication  for  an  indemnity  bond  as  to  the  nature 
of  the  duties  of  the  employee,  the  extent  of  his  authority, 
etc.,  are  in  the  nature  of  Avarranties,  and  a  breach  thereof 
will  avoid  the  bond. 

United  States  Fidelity  &  Guaranty  Co.  vs.  Ridgley, 
97  K  W.  836  (Neb.). 

ISTotAvithstanding  a  local  statute  providing  that  all  state- 
ments or  descriptions  in  an  application  for  insurance  shall 
be  deemed  representations,  and  not  warranties,  and  shall 
not  prevent  a  recovery  on  the  policy  unless  fraudulent  or 
material,  where  representations  in  an  application  for  an 
employee's  fidelity  bond  were  material  and  false,  the  bond 
was  invalid,  and  whether  they  were  fraudulent  or  not,  was 
immaterial. 

Warren  Deposit  Bank  vs.  Fidelity  and  Deposit  Co., 
116  Ky.  38. 

Where  the  answers  to  questions  and  representations  con- 
tained in  an  application  for  a  bond  of  indemnity  against 
the  dishonesty  of  the  cashier  and  bookkeeper  of  the  appli- 
cant were  expressly  declared  to  form  the  basis  of  the  con- 
tract under  the  proposed  bond,  such  answers  and  representa- 
tions became  a  part  of  the  bond  of  indemnity. 

And  where  the  applicant  for  a  bond  of  indemnity  repre- 
sented that  the  books  and  accounts  of  the  cashier  and 
bookkeeper  would  l)e  examined  and  audited,  and  all  mon- 
eys, etc.,  would  be  examined  and  verified  daily,  and  the  ap- 


5(3  rill-;   law   <»i     i- idki.ti'i-    i'.wxds. 

])liciint,  1)V  i-casoii  of  ;il)S('iic(',  fjiilrd  \'<>r  four  davH  to  comply 
with  the  terms  of  llic  coiifracf,  (hiiiii<!;  wliich  time  the  cash- 
ier absconded  with  the  em])loyer's  money,  sncli  fa i hire  dis- 
charf^ed  llie  surety  from  liahilitv  npon  the  bond. 
Young  vs.  Pac.  Siir.  ('....  137  Calif.  oOfi. 

In  an  action  on  a  fidelity  bond,  defended  on  the  ground 
that  the  plaintiff  in  a  statement  required  of  him  prior  to 
the  issuance  of  the  bond,  as.serted  that,  to  the  best  of  his 
knowledge  and  belief,  the  employee's  accounts  were  correct, 
and  that  he  was  not  in  arrears,  when,  by  due  care  in  exam- 
ining such  accounts,  a  shortage  could  have  been  discovered, 
an  instruction  to  find  for  plaintiff  unless  the  statement  was 
false  when  made,  to  the  best  of  plaintiff's  knowledge  and 
belief,  was  erroneous,  since  defendant  was  entitled  to  go  to 
the  jury  on  the  issue  of  plaintiff's  due  care  to  ascertain 
the  truth  before  making  the  statement. 

U.  S.  Fidelity  &  Guaranty  Co.  vs.  Blackly,  Hurst  & 
Co.,  25  ky.,  L.  R.  1271. 

A  failure  of  the  warranty  of  a  material  fact,  or  of  one 
made  material  by  the  terms  of  representations  of  a  contract 
when  equivalent  to  a  warranty,  if  acted  upon  in  issuing  a 
contract  of  insurance,  will  defeat  recovery,  and  if  this  de- 
fense is  sufficient  it  is  immaterial  that  bad  intent  is  also 
alleged,  but  the  party  alleging  bad  intent  cannot  complain 
of  the  submission  to  the  jury  of  the  issue  thus  raised. 

Perpetual  B.  &  L.  Assn.  vs.  IT.  S.  Fidelity  Sz  Guar- 
anty Co.,  118  Iowa,  720. 

47. — Same. 

Where  a  surety  company  issued  a  bond  to  a  local  agCTit 
with  instructions  not  to  deliver  it  until  the  employer  of 
the  persons  whose  fidelity  was  insured  had  made  a  certain 
written  statement,  and  the  employer  Avith  knowledge  of  the 
instructions  procured  the  bond  and  afterwards  furnished 
the  statement,  this  statement  was  properly  regarded  as  the 
foundation  for  issuance  of  the  bond. 


BEPRESENTATIONS  AND  WARRANTIES.  57 

Where,  after  the  execution  and  delivery  of  a  bond  secur- 
ing the  faithfuhiess  of  an  employee,  the  employer  signed  a 
written  statement  containing  an  agreement  that  it  should 
be  taken  and  deemed  as  the  basis  of  the  bond,  the  state- 
ment Avas  material  to  the  execution  of  the  bond. 

Where  a  surety  before  issuing  a  bond  indemnifying  an 
employer  against  loss  through  embezzlement  or  larceny  by 
the  employee  required  a  statement  from  the  employer  as  to 
when  the  employee's  accounts  were  last  examined,  whether 
they  were  correct,  whether  there  was  any  shortage,  and 
whether  the  employee  was  indebted  to  the  employer  at  the 
time,  answers  to  these  questions  were  material  to  the  risk, 
and  false  answers  rendered  the  bond  void. 

Am.  Bondg.  Co.  vs.  Burke,  85  Pac.  692  (Col.). 

Where  there  is  a  distinct  agreement  that  an  application 
for  credit  insurance  is  a  part  of  the  contract,  and  the  state- 
ments in  the  application  are  expressly  declared  to  be  war- 
ranties, they  are  to  be  treated  as  such,  and  not  merely  as 
representations,  and  must  be  strictly  true,  or  the  policy  will 
not  take  effect. 

American  Cred.  Ind.  Co.  vs.   Carrollton  Furniture 
Co.,  95  Fed.  111. 

Where  a  surety  company  issued  a  bond  indemnifying  a 
bank  against  the  default  of  its  cashier,  and  the  application 
made  by  the  bank  warranted  that  the  books  of  the  cashier 
would  be  examined  by  the  auditing  committee  monthly,  an 
examination  by  the  auditing  committee  once  in  each  month, 
but  not  on  any  fixed  monthly  date,  was  sufficient. 

An  examination  by  the  auditing  committee,  composed  of 
certain  directors  of  the  bank,  was  sufficient,  though  they 
were  not  expert  accountants. 

Where  a  bank  in  applying  to  a  surety  company  for  a 
bond  indemnifyying  it  against  default  of  its  cashier  war- 
ranted that  he  was  not  engaged  or  about  to  engage  in  any 
other  business,  the  fact  that  he  wrote  a  little  fire  insurance 


58  rilK    LAW    OF    FIDELITY    BONDS. 

aud  was  secretary  of  a  local  board  of  directors  of  a  build- 
ing association,  did  not  amount  to  a  breach  of  the  war- 
ranty. 

Am.  Bonding  Co.  vs.  Morrow,  9G  S.  W.  (Ark.)  613. 

Written  statements  made  by  a  corporation  accompanying 
an  application  to  a  bonding  company  for  a  bond  guarantee- 
ing tlic  honesty  of  employees,  which  statements  relate  to  the 
past  conduct  of  such  employees  in  their  service  as  such,  and 
are  intended  to  and  do  enter  into  the  contract  and  become 
the  inducement  in  part  for  the  issuing  of  the  bond,  are  in 
the  nature  of  warranties,  and  their  falsity  in  any  material 
particular  will  defeat  recovery  on  the  bond  for  the  delin- 
quency of  such  employees. 

Livingston   vs.    Fidelity   &•   Deposit   Co.,   81   X.    E. 
(Ohio)   330. 

A  false  statement  in  an  application  for  a  certificate  of 
indemnity  against  embezzlement  of  a  collector  of  the  in- 
sured, that  he  had  kept  true  and  just  accounts,  and  made 
prompt  returns,  and  was  not  indebted  to  the  insured,  is 
material,  and  a  defense  to  an  action  on  the  certificate, 
though  the  statement  was  made  honestly. 

Sullivan  vs.  Fraternal  Societies'  Co.  of  Ind.  Union, 
73  ]Sr.  Y.  Supp.  1094. 

48. — Same. 

A  fidelity  insurance  policy,  indemnifying  an  employer 
against  loss  by  reason  of  the  fraud  of  an  em])loyee  amount- 
ing to  embezzlement  or  larceny,  provided  that  it  was  en- 
tered into  on  the  condition  that  the  business  of  the  em- 
ployer shall  be  continued  to  be  conducted  in  accordance 
with  certain  statements  "in  writing"  Avhicli  the  employer 
had  delivered  to  the  insurer  relative  to  the  duties  of.  and 
check  to  be  used  on  the  employee,  and  that  the  statements 
and  answers  therein  contained  constituted  the  basis  of  the 
policy.     One  of  the  statements  so  made  was  to  the  effect 


EEPRESE]!^TATIONS  AND  WARRANTIES.  59 

that  the  employee's  cash,  securities  and  stock  would  be  com- 
pared and  verified  with  his  accounts  and  vouchers  twice  a 
week. 

Held,  that  the  failure  of  the  employer  to  comply  with  the 
stipulations  precluded  a  recovery  on  the  policy. 

Weider  vs.  Union  Surety  &  Guaranty  Co.,  86  IST.  Y. 
Supp.  105. 

Upon  being  solicited  by  a  brokerage  firm  to  execute  in 
its  favor  an  indemnity  bond  to  secure  it  from  loss  for  one 
year  from  acts  of  larceny  or  embezzlement  by  a  person 
whom  it  proposed  to  take  into  its  employment,  a  fidelity 
insurance  company  forwarded  to  it  for  signature  a  written 
application  for  that  purpose,  accompanied  by  a  number  of 
questions  for  it  to  answer,  among  them  the  following: 
"Have  you  knowledge  of  any  habit  of  the  applicant,  or  any 
circumstances  unfavorable  to  the  issuance  of  the  bond  ap- 
plied for?  If  so,  state  particulars.  Is  there  now  to  your 
knowledge  any  shortage  due?  Has  he  ever  been  short  to 
you  ?  Is  he  in  debt  to  you  ?"  To  which  questions  the  ap- 
plicant truthfully  answered,  "No."  The  company  then 
executed  a  bond  expiring  on  the  1st  of  April,  1904. 

Just  before  the  date  of  the  expiration  of  the  bond  the 
company  wrote  the  firm,  notifying  it  that  the  bond  was 
about  to  expire,  requesting  remittance  of  continuance  pre- 
mium, and  asking  it  to  sign  the  certificate  which  accompa- 
nied its  notification  and  forward  the  same  to  it,  when  the 
continuation  receij^t  Avould  be  sent  to  it.  The  firm  filled 
out  the  certificate  which  Avas  sent  to  it,  and  after  signing 
it,  returned  it  to  the  company.  The  continuation  receipt 
was  then  sent  to  the  firm.  It  subsequently  appeared  that 
the  employee  was  guilty  of  larceny  or  embezzlement  partly 
during  the  first  year  of  the  bond  and  partly  during  continu- 
ance of  the  bond  after  the  expiration  of  one  year.  The 
firm  claimed  that  the  company  was  responsible  for  the 
losses  during  both  periods.  The  latter  resisted  the  claim. 
The  District  Court  and  Court  of  Appeals  sustained   the 


<!(>  TIIK    LAW    Ol'     !■  ll»i;i.nV     ItoNDS. 

chuin  of  the  finii  on  the  ground  tliat  tlic;  stutciiicnls  iiiiifJi' 
in  the  coni  inu;ition  cortifipiitc  wore  representations,  and 
not  wnrnuities,  and  niidcr  the  terms  of  the  policy  they  did 
not  have  tlic  cffeet  of  a  warranty  if  honestly  answered. 
Held,  fiidi-.  Ilic  company  was  not  liable  for  the  loss  which 
was  suffered  after  the  cxpii-ation  of  tlie  year.  The  certifi- 
cate which  the  firm  sifrncd  and  sent  forward  certified  tliat 
"since  the  issuance  of  the  above  bond  the  employee  has 
faithfully,  honestly  and  punctually  accounted  to  me  for  all 
money  and  property  in  his  control  as  my  employee,  has 
always  had  proper  securities,  and  is  not  now  in  default 
to  me." 

Whether  the  statements  contained  in  this  certificate 
be  designated  as  "warranties"  or  "representations,"  they 
are  undoubtedly  matters  iipon  which  the  com])any  was  to 
determine  the  course  which  it  was  to  pursue  as  to  the  fu- 
ture. If  not  true,  they  destroy  the  basis  upon  which  the 
continuance  was  granted. 

Max  J.  Winkler  Brokerage  Co.  vs.  Fidelity  k  De- 
posit Co.,  44  S.  K.  (La.)  449. 

49. — Same. 

A  guaranty  bond  for  the  faithfulness  of  an  employee  pro- 
vided that  the  bond  might  be  continued  from  year  to  year, 
so  long  as  the  company  should  consent,  upon  payment  of 
the  premium  rate  agreed  on.  At  the  expiration  of  the  year 
for  which  the  bond  had  been  issued,  the  employer,  in  order 
to  continue  it  in  force,  certified  to  the  guaranty  company 
that  the  books  and  accounts  of  such  employee  had  been 
examined  by  him,  found  correct,  all  moneys  handled  by  the 
employee  accoimted  for,  and  he  knew  of  no  reason  why  tlio 
guaranty  bond  should  not  be  continued.  Held,  that  in  the 
absence  of  a  showing  of  fraud  in  obtaining  the  extension, 
the  certificate  was  merely  a  representation  of  a  fact  and 
not  a  warranty  of  its  truth. 

Remington  vs.  Fidt^lity  tS:  Deposit  Co..  27  Wash.  420. 


EEPEESENTATIOKS  A^SID  WARRANTIES.  Gl 

In  an  action  on  a  corporate  fidelity  bond  executed  on 
behalf  of  the  agent  of  plaintiff,  it  was  contended,  among 
other  defenses,  that  the  plaintiff  had  theretofore  delivered 
to  the  defendant  a  certain  certificate  in  writing  to  the  effect 
that  the  accounts  of  said  agent  had  been  examined  and 
found  correct  in  every  particular,  and  that  said  statement 
was  required  by  the  defendant  as  a  condition  upon  which 
said  bond  was  delivered,  and  that  the  averment  in  said  cer- 
tificate was  not  true. 

Held,  on  demurrer,  that  inasmuch  as  the  said  statement 
was  not  contained  in  the  agreement  sued  on  nor  referred  to 
therein,  it  must  be  held  to  be  a  representation  and  not  a 
warranty,  and  hence,  unless  false  to  the  knowledge  of  the 
plaintiff,  no  bar  to  a  recovery. 

Dime  Savings  Institution  vs.  American  Surety  Co., 
68  N.  J.  L.  440. 

A  corporate  fidelity  bond  recited  that  the  obligee  had 
delivered  to  the  company  certain  statements  relative  to 
the  duties  and  accounts  of  the  treasurer  which  it  was 
agreed  should  form  the  basis  of  the  contract  expressed  in 
the  bond.  Held,  that  if  such  statements  involved  no  mis- 
representation or  concealment,  the  contract  could  not  be 
affected  by  loose  parol  statements,  or  concealment  of  facts 
about  which  no  inquiry  was  made. 

Supreme  Council  C.  K.  of  A.  vs.  Fid.  &  Cas.  Co., 
63  Fed.  48. 

Statements  by  an  employer  in  an  application  for  a  fidu- 
ciary bond  for  one  of  his  employees,  that  such  employee's 
position  would  be  merely  that  of  bookkeeper,  and  that  the 
largest  amount  likely  to  be  in  his  custody  would  be  but  a 
few  dollars,  did  not  amount  to  warranting,  under  Ky.  St. 
1899,  sec.  639,  providing  that  all  statements  or  descrip- 
tions in  an  application  for  an  insurance  policy  shall  be 
deemed  representations  and  not  warranties. 

Champion,  kc,  vs.  American  Bonding  &  T.  Co.,  ll.'S 
Ky.  863. 


02  IIIK    i.AW    ()|-    Ml>KJ.n'V    BONDS. 

An  jipplication  to  a  surety  company  for  a  bond  to  secure 
the  faithlul  performance  of  his  duties  by  the  cashier  of 
the  applicant,  a  corporation,  contained  the  following  ques- 
tion and  answer:  "Will  he  receive  remittances  from  custom- 
ers on  ojKm  accounts?  If  so,  how  often  will  you  render 
customers  a  statement  of  balances  due  by  tli(;ni,  and  by 
whom  will  this  be  done?  This  should  be  done  by  some 
other  person  than  the  applicant,  and  is  important  as  a 
means  of  verifying  balances  appearing  on  the  ledger."  An- 
swer :  "Yes ;  monthly  by  bookkeeper." 

Held,  that  such  ansAver  was  not  a  warranty  that  such 
monthly  statements  should  be  delivered  to  the  customers  or 
deposited  in  the  mail  by  the  bookkeeper  personally,  but 
that  it  was  complied  Avith  Avhere  such  statements  were 
made  out  by  the  bookkeeper,  and  deposited  by  him,  in 
sealed  envelopes,  in  the  receptacle  used  for  outgoing  mail, 
according  to  the  customary  practice  of  the  corporation's 
business. 

Phenix  Insurance  Co.  vs.  Guarantee  Co.  of  N.  A., 
115  Fed.  964. 

50. — Same. 

In  an  action  on  a  bond  of  suretyship  of  a  general  man- 
ager of  £1  corporation  given  to  secure  his  honesty  in  the 
performance  of  his  duties  as  general  manager,  it  appeared 
that  by  the  bv-laAvs  of  the  corporation  the  general  manager 
should  have  supervision  of  the  affairs  of  the  association 
under  the  direction  of  the  board  of  directors,  and  should 
"perform  such  duties  in  the  detail  Avork  of  the  association 
as  shall  be  prescribed  from  time  to  time  by  the  board  of 
directors."  The  by-laws  also  provided  as  follows :  "It  shall 
be  the  duty  of  the  treasurer  to  receive  all  moneys  due  the 
association,  and  to  keep  account  of  the  same."  The  appli- 
cation for  the  bond  made  to  the  surety  company  as  gen- 
eral manager  and  approved  by  the  president  of  the  cor- 
poration stated  that  the  position  of  the  general  manager 
was  purely  clerical ;  that  itemized  reports  were  made  to  the 


REPRESENTATIONS  AND  WARRANTIES.  63 

directors  at  each  meeting  of  all  cash  received  at  the  office; 
that  moneys  received  in  payments  of  dues  Avere  deposited 
in  bank  each  day;  that  a  complete  system  of  credit  slips 
was  used,  and  that  the  books  and  vouchers  were  subject  to 
the  inspection  of  the  directors  at  all  times.  The  testimony 
showed  that  the  general  manager  had  charge  of  the  books 
of  the  association,  received  the  cash  and  deposited  it  in 
bank;  that  he  produced  at  each  meeting  of  the  directors  a 
statement  which  was  accepted  by  the  board,  showing  the 
amount  of  money  received  by  him,  and  that  it  was  in  the 
treasurer's  hands.  Held,  (1)  that  the  testimony  as  to 
statements  submitted  to  the  board  was  properly  admissible ; 
(2)  that  the  question  as  to  whether  the  loss  by  the  general 
manager's  dishonesty  was  covered  by  the  contract  was  for 
the  jury,  and  not  for  the  Court;  (3)  that  the  evidence  jus- 
tified the  finding  of  the  jury,  that  it  was  the  duty  of  the 
general  manager,  as  understood  by  both  parties  to  the  con- 
tract, to  receive  the  money,  which,  by  his  fraud  and  dis- 
honesty, the  pliantiif  lost;  (4)  that  a  verdict  and  judgment 
for  plaintiff  should  be  sustained. 

Harrisburg  Savings  &  Loan  Assn.  vs.  United  States 
Fidelity  &  Guaranty  Co.,  197  Pa.  St.  177. 

An  answer  to  a  question  contained  in  an  application  for 
a  bond  insuring  the  integrity  of  the  applicant  to  which 
application  no  reference  whatever  is  made  in  the  bond 
itself,  is  to  be  treated  as  a  representation,  rather  than  as  a 
warranty,  and  it  is  not  error  to  permit  the  jury,  in  an  ac- 
tion on  the  bond,  to  determine  whether  such  answer  was 
substantially  true  or  not. 

Missouri  K.  &  T.  Trust  Co.  vs.  German  Nat.  Bank, 
77  Fed.  119. 

Where  a  fidelity  bond  provided  that  any  willful  mis- 
statement "or  suppression  of  fact  by  the  employer,  in  his 
statement  or  declaration  concerning  the  employed,  should 
render   the   bond   void   from   the   beginning,"    the   phrase 


04  IIIK    LAW    OI'     FlDKI.riV     IJOXD.S. 

"wilU'lil  iiiisslatciiH'iit"  was  iiitciidcd  to  iiicaii  any  matt-rial 
false  statciiiciit  inadc  with  kiiowlcdfic  ol'  its  falsity,  volun- 
tarily, and  not  inadvertently,  and  hence  an  instruction  that 
the  hond  was  not  avoided  unless  the  misstatements  were 
made  '*M'ith  intent  to  secure  renewals  of  the  i)ond,"  was 
erroneous. 

Fidelity  &  Casualty  Co.  vs.  Bank  of  Timmonsville, 
139  Fed.  101. 

Where  a  fidelity  bond  securing  a  building  and  loan  asso- 
ciation against  the  embezzlement  of  its  secretary  ])rovided 
that  all  the  representations  made  by  the  employer  to  the 
surety  Avere  Avarranted  by  the  employer  to  be  true;  that 
the  employee  had  not,  to  the  knowledge  of  the  employer  or 
its  officers,  been  in  arrears  or  a  defaulter,  and  the  associa- 
tion stated  that  its  secretary  was  not  at  that  time  in  debt  to 
it ;  that  he  had  property,  funds,  securities  and  valuables  on 
hand  to  balance  his  accounts — such  statement  did  not  con- 
stitute a  warranty  that  the  secretary  Avas  not  indebted  to 
the  association  at  the  time  as  a  fact,  but  only  that  he  was 
not  so  indebted,  etc.,  to  the  knowledge  of  the  association  or 
its  officers. 

Am.  Eondg.  Co.  vs.  Spokane  Eldg.  »S:  Loan  Soc.  130 
Fed.  737. 

51. — Same. 

A  certificate  furnished  by  an  insurance  company  to  a 
surety  company,  at  the  request  of  the  latter,  stating  that 
the  agent  Avas  not  in  arrears  or  default,  and  never  had  been 
to  its  knoAvledge,  Avas  not  fraudulent,  although  at  the  time 
the  certificate  was  made  the  premiums  due  the  day  pre- 
vious had  not  been  paid,  and  although  payment  of  pre- 
miums had  been  delayed  before  from  ten  to  seventy  days; 
AA-here  the  acts  of  the  agents  were  treated  as  a  substantial 
com]dian(^e  by  the  insurance  company  Avith  the  terms  of  the 
contract,  and  the  delaA-  Avas  not  attributable  to  dishonesty 


REPRESENTATIONS  AND  WARRANTIES.  65 

or  lack  of  integrity  of  the  agent,  but  to  the  wide  field  of 
the  agency  and  the  difficulty  in  making  collections,  the 
time  for  the  return  of  which  had  been  practically  waived 
and  extended  by  the  company. 

Pacific  Fire  Ins.  Co.  vs.  Pac.  Sur.  Co.,  93  Calif.  9. 

Where  the  application  for  a  policy  of  (accident)  insur- 
ance is  not  made  a  part  of  the  contract  between  the  parties, 
and  the  policy  contains  no  warranty  of  the  truth  of  the  state- 
ments in  the  application,  both  the  materiality  and  the  truth 
of  the  statements  of  the  assured  in  applying  for  the  policy 
are  to  be  determined  by  the  jury  in  an  action  on  the  policy ; 
and  a  recovery  cannot  be  defeated  unless  such  statements, 
or  some  of  them,  are  found  to  be  both  material  and  untrue. 
I'idelity  &  Cas.  Co.  vs.  Alpert,  67  Fed.  460. 

A  writing  executed  by  a  corporation  for  the  purpose  of 
procuring  a  fidelity  bond  insuring  it  against  loss  through 
the  fraud  or  dishonesty  of  an  officer,  which  contains  ques- 
tions and  answers  and  representations  which  are  made  war- 
ranties, and  a  breach  of  which  by  the  terms  of  the  bond 
thereafter  issued  will  render  the  same  void,  is  an  applica- 
tion for  insurance  within  the  meaning  of  Iowa  Code,  1897, 
sec.  1741,  which  requires  insurance  companies  to  attach  a 
copy  of  the  application  to  each  policy  of  insurance  and 
provides  that  the  omission  to  do  so  shall  preclude  the  com- 
pany from  pleading  or  proving  any  part  of  such  application 
or  the  falsity  of  any  representations  made  therein  in  an 
action  on  the  policy. 

United  States  Fidelity  &  Guaranty  Co.  vs.  Egg  Ship- 
pers' Strawboard  &  Filler  Co.,  148  Fed.  352. 

An  original  employer's  liability  bond  was  issued  in  1901, 
insuring  plaintiff  against  the  employee's  misconduct  for  a 
year.  It  was  renewed  for  a  new  consideration  for  the  suc- 
ceeding year,  and  again  for  the  years  1903  and  1904;  the 
renewal  reciting  that  it  was  made  in  consideration  of  $20.00 
5 


GO  I  II  I.    LAW    Oh-    J'lDKI.nV     IJONDS. 

preiniuiii,  and  coiitimicd  the  IxmkI  in  force  to  June  1st, 
1904,  "subject  to  all  the  covenants  atid  conditions  thereof." 
Held,  that  the  r(>ncwal  did  not  include  a  statement  issued 
February  24,  1903,  executed  by  the  employer,  and  which 
stipulated  that  checks  signed  by  the  employee  would  be 
countersigned  by  the  general  manager  or  president,  and 
which  further  provided  that  the  answers  in  said  statement 
were  to  be  taken  as  conditions  precedent  to  and  as  the  basis 
of  the  execution  of  the  renewal  subsequently  delivered,  and 
in  consideration  of  such  renewal  it  was  further  agreed  that 
the  supervision  described  in  the  instrument  should  be  ob- 
served. The  surety  was  held  liable  notwithstanding  the 
fact  that  the  statement  referred  to  was  specifically  demand- 
ed by  and  delivered  to  it  as  the  condition  of  the  renewal  of 
the  bond,  and  that  the  evidence  showed  that  more  than  300 
checks,  which  aggregated  more  than  $150,000,  were  issued 
by  the  employee  without  the  countersignatures  covenanted, 
and  that  the  loss  complained  of  resulted  in  large  part,  if 
not  entirely,  from  the  use  of  such  checks.^ 

Aetna  Ind.  Co.  vs.  J.  R.  Crowe  Coal  &  Mining  Co., 
154  Fed.  545. 

52. — Same. 

In  an  action  against  a  guaranty  company  on  a  bond  by 
which  the  defendant  agreed  to  make  good  to  the  plaintiff 
any  pecuniary  loss  he  might  sustain  from  any  dishonesty 
of  a  certain  employee,  if  it  appears  that  the  defendant  is- 
sued the  bond,  relying  upon  a  statement  in  writing  signed 
by  the  plaintiff  that  he  had  examined  the  accounts  of  the 
employee  at  a  date  a  week  before  the  date  of  the  bond  and 
found  them  correct  in  every  respect  up  to  that  date,  and  if 
the  statement  was  not  true  and  the  employee  at  that  time 
was  a  defaulter  to  a  large  amount  and  a  proper  examina- 
tion of  his   accounts  would  have  disclosed  that  fact,  the 

3. — See    further    reference    to 
this  case.  Chap  1.  sec.  10,  post. 


EEPEESENTATIONS  AND  WAEKAjSTTIES.  67 

defendant  cannot  be  held  liable  for  a  breach  of  the  condi- 
tion of  the  bond  by  the  dishonesty  of  the  employee  causing 
loss  to  the  plaintiff. 

Glidden  vs.  United  States  Fidelity  &  Guaranty  Co., 
198  Mass.  109. 

Where,  in  an  application  for  a  corporate  fidelity  bond 
for  the  treasurer  of  a  fraternal  union,  the  obligee  stated 
that  the  treasurer's  accounts  would  be  examined  and  veri-' 
fied  every  three  months  by  its  board  of  trustees,  and  stipu- 
lated in  said  application  that  the  answers,  statements  and 
representations  therein  made  should  be  considered  war- 
ranties, and  where  at  an  examination  made  in  December 
it  was  found  the  treasurer  should  have  had  $740.00  on 
hand,  and  where  his  bank  book  showed  deposits  of  $440.00 
and  he  produced  the  balance  in  cash,  but  the  amount  alleged 
to  have  been  in  bank  was  not  verified,  and  where  in  Febru- 
ary following  it  was  learned  that  he  was  short.  Held,  that 
the  union's  failure  to  verify  the  correctness  of  the  amount 
of  funds  in  the  hands  of  the  treasurer  was  not  a  compli- 
ance with  the  safeguard  which  it  had  agreed  to  give  the 
company,  and  the  latter  was  therefore  relieved  of  liability 
under  its  bond. 

United  States  Fidelity  &  Guaranty  Co.  vs.  Downey, 
38  Colo.  414. 

The  fact  that  at  the  time  a  renewal  certificate  of  a  bank 
cashier's  guaranty  bond  was  issued  there  was  one  irregu- 
larity in  his  books  for  the  preceding  year,  consisting  of  an 
additional  cipher  being  placed  after  the  figures  "300,"  does 
not  prove  that  no  examination  of  the  books  was,  in  fact, 
made  by  the  bank  which  certified,  in  the  renewal  certifi- 
cate, that  the  books  were  "examined  from  time  to  time  in 
the  regular  course  of  business"  and  found  to  be  correct. 

A  statement  in  a  renewal  certificate  of  a  bank  cashier's 
guaranty  bond,  that  his  books  and  accounts  were  examined 
by  the  bank  "from  time  to  time  in  the  regular  course  of 


G8  Till';    LAW    OK    I'IDKLITV     HOXDS. 

busiuoss"  and  i'ouiid  to  be  c-orrcct,  does  not  mean  that  such 
an  exhaustive  examination  was  made  as  would  necessarily 
discover  the  slightest  irregularty  that  iiiif!:ht  exist,  however 
cunningly  covered  up. 

United  States  Fidelity  &  Guaranty  Co.  vs.  First  Na- 
tional Bank  of  Dundee,  233  111.  475. 

In  this  case  it  appears  to  have  heen  contended  by  the 
surety  company  that  the  issuance  of  a  renewal  certificate, 
procured  by  false  and  fraudulent  misrepresentations,  would 
relieve  the  surety  from  both  prior  and  subsequent  defaults. 
The  Court  says :  "That  such  is  not  the  construction  put 
upon  these  certificates  by  the  parties  is  shoA\Ti  by  the  limi-- 
tation  clause,  which  allows  one  year  after  the  expiration 
of  the  bond  in  which  to  discover  the  misconduct  of  the  em- 
ployee for  Avhose  fidelity  the  insurance  policy  is  procured. "^ 

Though  an  original  fidelity  bond  be  void  by  failing  to 
state  that  the  insured's  remuneration  was  a  commission  on 
his  sales,  yet  where  that  fact  appears  in  a  statement  made 
by  the  beneficiary  for  i-enewal  of  the  bond,  the  insurer  after 
accepting  and  retaining  the  premium  for  the  renewal  and 
issuing  certificate  therefor,  cannot  be  heard  to  complain  of 
the  original  misrepresentation,  whether  or  not  such  mis- 
representation constituted  a  breach  of  warranty. 

Long  Brothers'  Grocery  Co.  vs.  United  States  Fidel- 
.     ity  &  Guaranty  Co.,  130  Mo.  App.  421. 

Where  the  bond  of  a  bank  president  is  issued  by  a  surety 
company  and  accepted  by  the  bank,  upon  the  faith  of  cer- 
tain statements  and  representations  in  Avriting,  made  by 
the  assistant  cashier  of  the  bank,  relative  to  the  conduct, 
duties,  employment  and  accounts  of  the  defaulting  bank 
president,  and  such  statements  so  made  by  the  said  assistant 
cashier  are,  by  the  terms  of  said  bond,  made  a  part  of  the 
bond  itself,  the  bond  and  statements  together  form  the  con- 


EEPEESENTATIONS  AND  WARRANTIES.  69 

tract,  and  they  must  be  construed  together,  and  upon  their 
construction  as  a  whole  must  depend  the  rights  and  liabili- 
ties of  the  parties  thereto ;  and  where  the  bond  is  issued  by 
the  surety  company  and  accepted  by  the  bank  upon  the 
faith  of  the  statements  and  representations  so  made  by  the 
assistant  cashier,  the  receiver  of  the  bank,  later  appointed, 
in  an  action  on  the  bond,  cannot  be  heard  to  repudiate  or 
question  the  authority  of  the  assistant  cashier  to  bind  the 
bank  by  his  statements  and  representations  concerning  the 
conduct,  duties,  employment  and  accounts  of  the  defaulting 
bank  president,,  and  at  the  same  time  be  allowed  to  recover 
on  the  bond  procured  on  the  strength  of  the  statements  and 
representations  so  made  by  the  assistant  cashier. 

Willoughby  vs.   Fidelity  &  Deposit  Co.,   15   Okla. 
546. 

Where  the  contract  between  the  plaintiff  and  its  agents 
described  the  latter  as  brokers  or  commission  merchants,  a 
representation  to  a  company  insuring  the  fidelity  of  such 
agents  that  they  were  brokers  is  not  a  fraud  vitiating  the 
bond. 

Sinclair  &  Co.  vs.  National  Surety  Co.,  132  Iowa, 
549. 


53. — Authority  of  Officer  of  Corporation  in  Making  Application  for 
Fidelity  Bond  of  Employe  Thereof.! 

With  reference  to  the  effect  of  statements  made  by  the 
president,  secretary  or  other  executive  officer  of  a  corporation, 
as  to  the  accounts  of,  supervision  over  and  other  matters  per- 
taining to  the  employee,  and  the  authority  of  such  officer  to 
make  such  statements,  see  the  following  cases.    It  will  be  ob- 

1.— See  Chapters  20  and  21. 
pout,  and  Chapter  1,  sec.  1(J, 
ante. 


70  THE   LAW    OF   FIDELITY    BONDS. 

served  tbei'e  is  great  conflict  on  the  j)oiut,  and  reference  to 
the  eases  will  therefore  be  necessary  to  even  approximately 
detenu inc  tlio  legal  effect  of  such  statements: 

A  president  of  a  national  bank  has  no  power,  in  the  ordi- 
nary course  of  business,  to  certify  to  the  fidelity  or  integ- 
rity of  a  cashier  for  the  purpose  of  enabling  him  to  procure 
a  bond  insuring  his  fidelity;  and  hence  the  bank  cannot  be 
deemed  merely  by  virtue  of  the  president's  relation  to  it, 
to  have  any  knowledge  of  the  giving  by  him  of  such  certifi- 
cate. 

Am.  Sur.  Co.  vs.  Pauly,  170  U.  S.  133. 

A  bank  cashier  applying  to  a  surety  company  for  a  bond 
accompanied  the  application  with  a  statement  as  to  his 
past  conduct  and  the  condition  of  his  account,  signed  by 
the  president  of  the  bank,  which  was  incorrect,  though 
made  in  good  faith.  Such  statement  was  not  referred  to  in 
the  bond  issued.  The  president  had  no  special  authority 
to  make  it  and  none  of  the  directors  knew  of  it  until  inter- 
posed as  a  defence  in  a  suit  on  the  bond;  defendant  claim- 
ing that  the  statement  was  either  a  false  warranty  by  the 
bank  or  a  misrepresentation  by  it  of  material  facts,  which 
induced  defendant  to  execute  the  bond. 

Held,  that  making  the  statement  was  no  part  of  the  du- 
ties of  the  office  of  president,  and  not  within  his  implied 
powers  07-  ordinary  duties,  but  Avas  his  individual  act.  by 
which  the  bank  was  not  bound. 

United   States  Fidelity  &  Guaranty  Co.  vs.  Muir, 
115  Fed.  264. 

Where  a  corporate  fidelity  bond  provides  that  certifi- 
cates issued  by  the  president  of  a  savings  bank  shall  consti- 
tute an  essential  part  of  the  conti'act,  and  such  certificate 
contains  a  misrepresentation  as  to  the  fact  of  the  teller 


REPRESENTATIONS    AND    WARRANTIES. 


71 


having  engaged  in  speculation,  the  bank  cannot  recover  on 
the  bond. 

Guarantee    Co.    of   IST.    A.    vs.    Mechanics'    Savings 
Bank,  183  U.  S.  402.2 


2. — This  controversy  was  be- 
gun by  the  filing  of  a  bill  in 
chancery  in  the  Chancery  Court 
of  the  State  of  Tennessee  by  the 
plaintiff  bank  against  the  estate 
of  its  late  teller  and  casheir  and 
the  surety  on  his  bonds,  for  ac- 
count and  decree  on  the  bonds. 
The  case  was  removed  thence  to 
the  United  States  Circuit  Court 
for  the  Middle  District  of  Ten- 
nessee, where  the  case  was  tried 
and  judgment  rendered  in  favor 
of  the  plaintiff,  on  both  bonds, 
with  interest  and  costs,  with  pri- 
mary liability  against  the  princi- 
pal's estate.     68  Fed.  459  (1895). 

On  appeal  to  the  Circuit  Court 
of  Appeals,  Sixth  Circuit,  1896, 
the  former  decision  was  affirmed, 
and  it  was  also  held  that  where 
the  principal  joins  in  a  corporate 
fidelity  bond  for  the  purpose  of 
entering  into  an  obligation  to  the 
surety,  the  liability  is  not  joint ; 
the  suit  having,  without  objec- 
tion, been  removed  to  the  Fed- 
eral Court  by  one  of  two  de- 
fendants sued  upon  a  joint  and 
several  obligation,  plaintiff,  by 
proceeding  to  trial  without  pro- 
test and  taking  judgment  against 
the  defendant  on  whose  petition 
the  removal  was  made,  consented 
to  a  severance  of  the  joint  action, 
as  he  had  a  right  to  do.  SO  Fed. 
766,  26  C.  C.  A.  146   (1896). 

Rehearing  denied.  82  Fed. 
545,  27  C.  C.  A.  373   (1897). 


Thereafter  the  case  was  car- 
ried by  a  writ  of  certiorari  to 
the  Supreme  Court  of  the  United 
States,  178  U.  S.  612,  where  the 
judgment  was  reversed  upon  the 
single  ground  that  the  Court  had 
not  jurisdiction  of  the  appeal, 
because  the  judgment  upon  which 
the  appeal  was  taken  was  not 
final,  and  the  cause  was  remand- 
ed with  directions  to  dismiss  the 
appeal  prosecuted  to  the  Circuit 
Court  of  Appeals,  and  for  such 
further  proceedings  in  the  Cir- 
cuit Court  as  may  be  consistent 
with  law.     173  U.  S.  582   (1899). 

Final  judgment  was  thereupon 
entered  by  the  Circuit  Court,  sub- 
stantially as  in  the  first  instance. 

The  case  was  again  taken  to 
the  Circuit  Court  of  Appeals  on 
appeal,  where  it  was  held  that 
the  surety  of  a  bank  cashier,  un- 
der the  bonds  in  suit,  was  not 
liable  for  the  amount  of  over- 
drafts on  the  bank  paid  by  the 
cashier  without  authority  from 
the  bank,  when  it  was  not  shown 
that  the  cashier  received  any 
part  of  such  amount,  or  any  bene- 
fit therefrom,  and  the  case  was 
remanded  to  the  Circuit  Court, 
with  directions  to  modify  its 
judgment  as  indicated.  100  Fed. 
559,  40  C.  C.  A.  542  (1900). 

Certiorari  was  then  allowed  by 
the  Supreme  Court  of  the  United 
States,  which  reversed  both  the 
Circuit  Court  and  Circuit  Court 


THE    I-A\V    ()!•■    I' IDKI.I'IV     HoNDS. 

Ill  :i  suit  on  ii  coritoratc  fidelity  Ixtiid,  it  was  error  for 
the  tri;il  ('ouit  to  refuse  to  periiiir  defendants  to  introduce 
in  evidence  an  inquiry  by  the  president  of  the  surety  com- 
])any,  addressed  to  the  phiintiff,  as  to  the  renewal  of  the 
Ixmd  of  the  president  of  the  hank,  and  the  reply  of  the 
cashier  thereof,  containing  an  assurance  that  the  president 


of  Apiieals.  and  rcniamlrd  tlic 
cause  lor  further  proceedings, 
and  hold  as  follows  (1S3  T".  S. 
402)  : 

Where  a  bond  insurin.L;;  a  i)ank 
a,i;ainst  such  pecuniary  loss  as  it 
uilsht  sustain  b.v  reason  of  the 
fraudulent  acts  of  its  teller,  con- 
tained a  provision  that  the  com- 
pany would  notify  the  insuring 
company  on  "becoming  aware"  or 
the  teller  "being  engaged  in  spec- 
ulation or  gambling."  it  is  the 
duty  of  tlie  bank  to  give  such  no- 
tice, when  informed  that  the  tel- 
ler is  specuhxtiug,  although,  while 
confessing  the  fact  of  speculat- 
ing, lie  asserts  that  he  has  ceasen 
to  do  so. 

When  the  teller  is  in  fact  en- 
gaged in  speculation  and  tlie 
bank  is  so  informed,  it  cannot  re- 
cover on  such  a  bond  for  losses 
occurring  through  his  fraudulent 
acts  after  the  information  is  re- 
ceived, when  it  has  not  notified 
the  company  of  what  it  has  heard 
or  made  any  investigation,  but 
has  accei>ted  the  teller's  assur- 
ance of  i>resent  innocence  as  suf- 
ficient, on  the  mere  ground  that 
it  liad  confidence  in  his  integrity. 
When  at  the  time  the  teller's 
bond  was  renewed  the  books  of 
the  bank  showed  that  he  was  a 
defaulter   in   the  sum   of  .-^lO.rnn 


understated  liabilities,  and  ot 
.'j:3,7(ir).44  abstracted  from  bills  re- 
ceivable, both  of  which  could  have 
been  detected  by  the  taking  of  a 
trial  balance  or  a  mere  compari- 
son lietween  the  books  kept  by 
him  and  the  individual  ledger 
kept  by  another  person,  and  by  a 
correct  footing  of  the  notes,  the 
bank  is  open  to  the  charge  of 
lache.s.  and  a  certificate  that  the 
accounts  of  the  teller  had  been 
examined  and  verified  is  not 
truthful. 

Where  it  is  known  to  the  pres- 
ident of  the  banlc  that  the  insur- 
ing company  regards  engage- 
ments in  speculation  as  unfavor- 
able to  an  employee's  habits,  and 
he  is  informed  that  the  employee 
is  speculating,  a  representation 
by  the  president  that  he  has  not 
known  or  heard  anything  unfa- 
vorable to  the  employee's  habits, 
past  or  present,  or  of  any  mat- 
ters concerning  him.  about  which 
the  president  deems  it  advisable 
for  the  company  to  make  inquiry 
is  a  misrepresentation. 

It  is  interesting  to  note  that 
the  Supreme  Court,  in  the  Paiihi 
Cane.  170  V.  S.  ^3S.  Chapter  1. 
sec.  10.  note.  ante,  and  Chap.  2. 
sec.  53.  above,  held  that  a  presi- 
dent of  a  National  Rank  has  no 


KEPEESENTATIONS    AND    WARRANTIES. 


73 


had  up  to  that  time  performed  his  duties  in  a  satisfactory- 
manner.  But  held  in  this  case  the  error  was  not  preju- 
dicial, and  hence  no  ground  for  reversal. 

Eidelity  &  Deposit  Co.  vs.  Courtney,  186  U.  S.  342. 

Where  a  bank  seeks  to  avail  itself  of  the  benefit  of  the 
actions  of  its  president  in  securing  the  execution  of  a  bond 
guaranteeing  the  fidelity  of  its  cashier,  it  must  accept  such 
actions  subject  to  the  president's  representations  inducing 
the  execution  of  the  contract  by  the  surety;  and  it  must 
be  held  to  have  assented  to  the  conditions  of  the  bond  pro- 
viding that  the  representations  made  by  the  president  rela- 
tive to  the  duties  and  accounts  of  the  cashier  should  consti- 
tute an  essential  part  and  form  the  basis  of  the  contract.  • 
Warren  Deposit  Bank  vs.  Fidelity  &  Deposit  Co., 
116  Ky.  38. 

Where  it  is  no  part  of  the  duty  of  the  secretary  of  an 
insurance  association  to  certify  that  the  books  and  accounts 
of  the  president  had  been  audited  and  found  correct,  the 
association  was  not  bound  by  such  certificate  furnished  by 


power,  in  the  ordinary  course  of 
business,  to  certify  to  the  fidelity 
or  integrity  of  a  cashier  for  the 
purpose  of  enabling  him  to  pro- 
cure a  bond  insuring  his  fidelity; 
and  hence  the  banli  cannot  be 
deemed  merely  by  virtue  of  the 
president's  relation  to  it,  to  have 
any  knowledge  of  the  giving  by 
him  of  such  certificate ;  and  de- 
nied certiorari  (187  U.  S.  047)  in 
the  Muir  Case  (115  Fed.  246), 
Chap.  2,  sec.  53,  involving  the 
same  question;  while  in  the  Me- 
chanics' Bank  Case,  183  U.  S.  402, 
it  held  that  a  savings  bank  and 
trust  company  was  bound  by  the 
knowledge  and  acts  of  its  presi- 
dent, as  above  shown,  and  again 


in  the  Courtney  Case,  186  U.  S. 
342,  Cliap.  2,  sec.  53,  it  held  it 
was  error  for  the  trial  Court  to 
refuse  to  permit  defendants  to 
introduce  in  evidence  an  inquiry 
by  the  president  of  the  surety 
company,  addressed  to  the  plain- 
tiff, as  to  the  renewal  of  the 
bond  of  the  president  of  the  bank, 
and  the  re])ly  of  the  cashier  there- 
of, containing  an  assurance  that 
the  president  had  up  to  that  time 
performed  his  duties  in  a  satis- 
factory manner. 

The  three  above-mentioned 
cases  are  the  only  ones  involving 
the  construction  of  a  corporate 
fidelity  bond  that  have  been  con- 
sidered by  the  Supreme  Court. 


74  THK    LAW    OF    FIDELITY    BONDS. 

the  secrelary  to  a  surety  company  executing  the  president's 
official  bond. 

Sherman  vs.   Harbin,  125  Iowa,  174. 

Where  the  certificate  of  the  president  of  a  building  and 
loan  association  to  a  surety  company  stating  that  the  ac- 
counts of  an  employee  were  correct  in  every  respect  pur- 
ported to  be  simply  his  statement  made  to  the  best  of  his 
knowledge  and  belief,  the  fact  that  at  the  time  the  auditing 
committee  knew  an  error  existed  in  the  employee's  accounts 
did  not  relieve  the  surety  company  from  liability.  The 
making  of  an  employer's  statement  was  not  within  the  du- 
ties of  such  president. 

Perpetual  B.  &  L.  Assn.  vs.  U.  S.  Fidelity  k  Guar- 
anty Co.,  118  Iowa,  729. 

Where  a  bank,  in  order  to  acquire  knowledge  on  which 
to  base  its  statements  as  to  the  honesty  of  an  employee  in 
an  application  to  a  guaranty  company  for  a  bond  for  such 
employee,  employs  an  expert  examiner  to  examine  such  em- 
ployee's accounts,  on  whose  examination  and  report  it  bases 
such  statements,  it  is  not  chargeable  with  such  examiner's 
negligence. 

In  such  case,  the  bank  was  chargeable  only  with  the  exer- 
cise of  ordinary  care  in  selecting  a  competent  examiner  to 
investigate  the  employee's  accounts. 

Fidelity  (S:  Guaranty  Co.  of  X.  Y.  vs.  Western  Bank, 
29  Ky.  L.  R.  639. 

In  a  suit  upon  a  fidelity  bond  the  burden  is  not  upon  the 
plaintiff  to  prove  compliance,  but  upon  the  defendant  to 
prove  a  breach  of  the  conditions. 

Sinclair  <S:  Co.  vs.  Xatl.  Surety  Co.,  13  Iowa,  549. 

54. — Further  Reference  to  Same  Subject. 

See  further.  Chapter  24,  Cashier  as  Agent  of  Bank. 

As  to  the  effect  of  knowledge  of  insurer's  agent  of  falsity 


BEPRESENTATIONS  AND  WAEKANTIES.  75 

of  statements  iu  application,  see  note  to  Clemans  vs.   Su- 
preme Assembly,  16  L.  R.  A.  33. 

As  to  what  constitutes  knowledge  of  default,  see  Chapter 
19  and  knowledge  of  officer  of  corporation,  Chapter  20. 

55. — Representations  and  Warranties  in  Insurance  Policies. 

Further  referennce  to  decisions  with  reference  to  repre- 
sentation and  warranties  in  insurance  policies  may  be  made 
to  the  following  cases : 

Jeffries  vs.  Ins.  Co.,  22  Wall.  47. 

Moulor  vs.  Ins.  Co.,  Ill  U.  S.  335. 

Phoenix  Life  Ins.  Co.  vs.  Raddin,  120  U.  S.  183. 

Ins.  Co.  vs.  France,  91  IT.  S.  510. 

CarroUton  Furniture  Co.  vs.  Am.  Cred.  Ind.  Co., 

124  Fed.  25. 
Logan  vs.  Provident .  Sav.  &  L.  Assn.   Soc,   57 

W.  Va.  384. 
First  ISTat.  Bank  vs.  Fidelity  &  Guaranty  Co., 

110  Tenn.  10. 
Harbour  Commissioners  vs.  Guarantee  Co.  of  IS". 

A.,  22  Can.  Sup.  Ct.  Rep.  542. 

It  has  been  held  that  a  life  insurance  company  is  not  re- 
quired to  tender  return  of  premiums  to  enable  it  to  defend 
on  the  ground  of  fraudulent  misrepresentations  in  procuring 
the  policy. 

United  States  Life  Ins.  Co.  vs.  Smith,  92  Fed. 
503. 

56. — Statements  by  Public  Officers. 

With  reference  to  effect  of  statements  and  publications 
made  by  public  officers  upon  the  liability  of  a  corporate  or 
other  fidelity  bond  executed  on  behalf  of  another  officer,  see 
Chapter  4,  laches,  etc. 


7(>  TIM.  LAW  (ii-  !•  ii>i;i.ri •^•   konds. 


CO. 

I'lirtlicr  rcforeuces. 

<;i. 

Leadiiif:  caso-s  on  negligence 

by  obligee. 

(52. 

Digest  of  authorities. 

03. 

Same. 

(;4. 

Same. 

05. 

Same. 

06. 

Rule  inapplic.-ihle  to  govern- 

ment  or   other    sovereign 

body. 

07. 

Further   references. 

OS. 

Private  corporations. 

CHAPTER  III. 

FRAUD    IN    PROCURING    BOND. 

57.  Effect  on  liability  of  surety 

of  non-disclosure  upon 
proper  inquiry  or  oppor- 
tunity or  fraudulent  con- 
cealment or  misrepresent- 
ation of  material  facts  by 
obligee  at  the  time  of  or 
previous  to  the  execution 
of  the  bond. 

58.  Fraudulent  or  negligent  acts 

of  obligee. 

59.  Leading  cases  on  fraudulent 

representation. 

57. — Effect  on  Liability  of  Surety  of  Non=DiscIosure  Upon  Proper 
Inquiry  or  Opportunity  or  Fraudulent  Concealment  or  Mis= 
representatin  of  Material  Facts  by  Obligee  at  the  Time  of 
or  Previous  to  the  Execution  of  the  Bond. 

In  the  preceding-  Chapter  reference  was  made  to  corporate 
fidelity  bonds  exclnsively,  and  to  the  written  statements  con- 
stituting representations  or  warranties  made  by  the  insured 
in  the  form  of  proposals  or  "employers  statements,"  and  be- 
ing referred  to  and  usually  made  a  part  of  the  contract.  In 
this  Chapter  reference  is  made  to  fidelity  bonds  generally, 
and  to  the  duty  of  disclosure  and  effect  of  non-disclosure  by 
the  obligee  of  facts  materially  affecting  the  risk. 

The  contract  of  suretyship  imports  entire  good  faith  and 
confidonce  between  the  parties  in  regard  to  the  whole 
transaction.  Any  concealment  of  material  facts,  or  any 
erpress  or  implied  misrepresentation  of  such  facts,  or  any 
undue  advantage  taken  of  the  surety  by  the  creditor,  either 


FEAUD   IN   PROCURING   BOND.  77 

by  surprise  or  withholding  proper  information,  will  un- 
doubtedly furnish  sufficient  ground  to  invalidate  the  con- 
tract. 

Story^  Eq.  Juris.,  sec.  324. 

CLilds,  Sur,  &  Guar.,  sec.  54. 

Brandt,  Sur.  &  Guar.,  sec.  256. 

White  vs.  Life  Assn.,  63  Ala.  419. 

Domestic  Sewing  Machine  Company  vs.  Jackson,  83 
Tenn.  418. 

Booth  vs.  Storrs,  75  111.  438. 

If  a  psrty  taking  a  guaranty  from  a  surety  conceals  from 
him  facts  which  go  to  increase  his  risk  and  suffers  him 
to  enter  into  the  contract  under  false  impressions  as  to  the 
real  state  of  the  facts,  such  concealment  will  amount  to  a 
fraud  because  the  party  is  bound  to  make  the  disclosure; 
and  the  omission  to  make  it  under  such  circumstances  is 
equivalent  to  an  affirmation  that  the  facts  do  not  exist. 

So,  if  a  party  knowing  himself  to  be  cheated  by  his 
clerk,  and  concealing  the  fact,  applies  for  security  in  such 
a  manner  and  under  such  circumstances  as  holds  the  clerk 
out  to  others  as  one  whom  he  considers  as  a  trustworthy 
person,  and  another  person  becomes  his  security,  acting 
under  the  impression  that  the  clerk  is  so  considered  by  his 
employer^  the  contract  of  suretyship  will  be  void;  for  the 
very  silence  under  suoh  circumstances  becomes  expressive 
of  a  trust  and  confidence  held  out  to  the  public  equivalent 
to  an  affirmation. 

Story,  Eq.  Juris.,  sec.  215. 
Brandt,  Sur.  &  Guar.,  sec.  472. 

And  where  persons  take  upon  themselves  to  make  asser- 
tions as  to  which  they  are  ignorant  whether  they  are  true 
or  untrue,  they  are  as  responsible  as  if  they  had  asserted 
that  which  they  knew  to  be  untrue.  Whether  a  party  mis- 
representing a  fact  knew  it  to  be  false,  or  made  the  asser- 
tion  without  knowing  whether  it  were   true   or   false,   is 


<0  Till';    LAW    OK    J-IDKLITY    BONDS. 

wlHtlly  iiiiiiiiitcrial ;  lor  the  allii-iiiat  ion  oi'  wiitit  oiio  does 
not  know  or  believe  to  hv  true  is  as  unjustifiable  as  the 
affirmation  of  what  is  known  to  be  false. 

Lawson  on  Contracts,  sec.  238. 

Childs,  Sur.  &  Guar.,  sec.  54. 

58. — Fraudulent  or  Negligent  Acts  of  Obligee. 

Under  this  general  title  there  are  two  classes  01  cases.  The 
tirst,  those  in  which  the  employer  or  obligee,  knowing-  or  sus- 
pecting and  believing  that  his  servant  is  in  default,  requires 
him  to  give  bond,  and  either  directly  f>r  imi)liedly  holds  him 
out  as  trustworthy  for  such  pur])ose,  thereby  seeking  security 
for  the  past  as  well  as  possible  future  defaults,  and  practicing 
a  deliberate  fraud  upon  the  surety.  The  second,  are  those 
cases  in  which  the  obligee  actively  represents,  or  pas- 
sively or  negligently  permits  the  surety  to  believe  the  em- 
I)loye(>  worthy  of  the  ])roposed  assurance,  when  he  knows 
or  could  by  ordinary  diligence  know  of  ]irior  defaults  or  other 
circumstances  materially  affecting  the  risk  which  are  uncom- 
municated  and  unknown  to  the  surety. 

59. — Leading  Cases  on  Fraudulent  Representation. 

Under  the  first  proposition,  the  leading  English  case  is 
Smith  vs.  Bank  of  Scotland,  1  Dow.,  272  (1813),  which  held: 
"If  a  principal,  suspecting  the  fidelity  of  his  agent,  re- 
quires security  in  a  way  which  holds  him  out  as  a  trust- 
worthy person,  the  surety  is  not  liable." 

The  leading  American  case  on  this  point  is  Franklin  Bank 
vs.  Cooper,  36  IMe.  179,  39  Me.  542  (1853),  which  held: 

"It  is  a  fair  presumption  that  one,  becoming  a  surety, 
does  it  upon  a  belief  that  the  principal  parties  are  con- 
ducting in  the  usual  course  of  business,  subjecting  him  only 
to  the  ordinary  risks  attending  it.  To  accept  a  surety  known 
to  be  acting  upon  a  belief,  that  there  are  no  unusual  cir- 


FKAUD    IN    PEOCURING   BOND.  79 

cumstances  by  which  his  risk  will  be  materially  increased, 
while  the  party  thus  accepting  knows  that  there  are  such 
circumstances,  and  withholds  the  knowledge  of  them  from 
the  surety,  though  having  a  suitable  opportunity  to  com- 
municate them,  is  a  legal  fraud,  which  discharges  the 
surety. 

''The  bond  of  a  bank  cashier,  framed  to  cover  past  as 
well  as  future  delinquencies,  will  be  invalid  against  a  surety 
if  his  name  was  procured  at  the  desire  of  the  directors, 
they  knowing  that  past  defalcations  existed,  of  which  he 
was  ignorant,  and  withholding  the  knowledge  from  him^ 
though  with  a  suitable  opportunity  to  communicate  it." 

The  rule  is  thus  stated  in  th.e  important  case  of  Dinsmore 
vs.  Tidball,  34  Ohio  St.  411: 

"If  a  principal  having  knowledge,  or  a  belief  founded 
on  reasonable  and  reliable  information,  that  his  agent  is  a 
defaulter,  requires  sureties  for  his  fidelity  in  the  future, 
and  holds  him  out  as  a  trustworthy  person,  whereby  such 
security  is  obtained,  he  cannot  afterwards  avail  himself  of  a 
guaranty  so  obtained  from  a  person  who  was  ignorant  of 
what  was  known  to,  and  ought  to  have  been  disclosed  by, 
the   employer." 

60. — Further  References. 

This  case  was  followed  and  approved  in  Smith  vs.  Josse- 
lyn,  40  Ohio  St.  409,  and  constitutes  the  general  rule  in  the 
American  Courts.  Indeed,  it  is  founded  upon  such  princi- 
ples of  manifest  justice,  as  well  as  fundamental  principles  of 
law,  as  to  leave  no  room  for  question.  (See  valuable  note  on 
the  subject  in  63  Am.  St.  Rep.  335.) 

The  cashier  of  a  bank,  who  had  furnished  a  bond  signed 
by  a  fidelity  insurance  company,  which  had  from  time  to 
time  been  renewed,  on  the  occasion  of  one  expiration  re- 
fused to  renew.  Two  months  afterwards  he  left  the  city 
without  notice   to  the  bank,   taking  with  him  $5,000   of 


80  rilK    J-A\V    ()!••    I'lUKlAiV    J{().\I>S. 

the  hiiiik's  iiioiicv.  Two  or  tliree  days  latci-  llic  |ii-csideiit 
of  tlic  l);iiik,  with  knowledge  of  such  facts,  but  witliout  dis- 
closing tlicni  to  the  conipany,  caused  the  renewal  jjixMuium 
to  be  paid  and  the  bond  renewed.  Held,  in  an  action  by 
the  bank  to  recover  on  the  l)on(l  for  the  $5,000  defalcation, 
a  finding  by  the  jury  that  such  facts  wei"c  suppressed  by 
plaintiff's  officer  for  defrauding  tiie  defendant  by  inducing 
it  to  make  the  renewal  justified  a  judgment  for  defendant. 
J^ational  Bank  of  Asheville  vs.  Fidelity  (^'  Casualty 
Co.,  89  Fed.  819. 

6i. — Leading  Cases  on  Negligence  by  Obligee. 

The  leading  English  case  upon  the  second  proposition  is 
Kailton  vs.  :Mathe\vs,  10  CI.  &  F.  H.  L.  Cas.  934,  which  held : 
''The  mere  non-communication  of  circumstances  affect- 
ing the  situation  of  the  parties,  material  for  the  surety  to 
be  acquainted  Avith,  and  within  the  knowledge  of  the  per- 
son obtaining  a  surety  bond,  is  undue  concealment,  though 
not  wilful  or  intentional,  or  with  a  view  to  any  advantage 
to  himself." 

And  this  is  the  rule  sup]iorted  bv  the  groat  weight  of  au- 
thority in  America. 

62. — Digest  of  Authorities. 

There  are  suretyships  required  by  individuals  or  pri- 
vate corporations  for  protection  against  loss  by  reason  of 
the  unfaithfulness  of  clerks  or  servants;  the  nature  and 
extent  of  the  duties  which  these  have  undertaken  to  per- 
form and  of  the  trust  which  has  been  confided  to  them,  and 
the  state  of  the  accounts  between  them  and  their  employers 
at  any  given  time,  can  accurately  be  known  by  the  surety 
only  by  the  acts  and  words  of  the  employer;  if,  therefore, 
the  latter,  knowing  the  surety  to  be  shut  up  to  this  single 
source  of  information,  misleads  him  to  his  injury,  the  law 


FRAUD   IN    PEOCURING    BOND.  81 

will  not  permit  tlie  employer  to  reap  any  advantage  from 
concealment  or  misrepresentations. 

State  vs.  Howarth,  48  Conn.  207. 

"It  is  a  well-settled  rule  of  law  that  if  a  creditor  induces 
a  surety  or  guarantor  to  enter  into  the  contract  of  surety- 
ship or  guaranty  by  any  fraudulent  concealment  or  misrep- 
resentation of  material  facts  that  the  surety  or  guarantor 
will  be  released." 

63  Am.  St.  Eep.  327. 

If  the  proposed  surety  in  a  bond  for  the  conduct  of  an 
employee  makes  inquiry  of  the  proposed  obligee  as  to  the 
previous  conduct  of  the  employee,  such  obligee  is  bound  to 
make  full  disclosure  of  all  material  facts  within  his  knowl- 
edge bearing  on  the  risk,  and  if  he  fails  to  do  so  or  knowingly 
makes,  in  response  to  the  inquiry,  false  representations  as 
to  such  facts,  or  does  so  ignorantly,  but  under  such  circum- 
stances as  would  naturally  lead  the  inquirer  to  believe  the 
representations  to  be  based  on  an  investigation,  and  the  pro- 
posed surety  is  thereby  induced  to  sign  the  bond^  he  may 
avoid  liability  thereon  on  the  ground  of  fraud. 

But  an  innocent  representation  in  such  a  case,  such  as 
the  assertion  of  a  mere  opinion  or  the  misstatement  of  a 
fact  through  mere  ordinary  negligence  not  made  under  such 
circumstances  as  to  suggest  that  it  was  based  on  an  investi- 
gation, will  not  relieve  the  surety  of  liability. 

Brillion  Lumber  Co.  vs.  Barnard,  131  Wis.  284. 

Remington  S.  M.  Co.  vs.  Keyertee,  49  Wis.  409. 

Bank  vs.  Anderson,  65  Iowa,  692. 

Benton  Co.  Savings  Bank  vs.  Boddicker,  105  Iowa, 
548. 

Frank  Felir  Brewing  Co.  vs.  Mullican,  23  Ky.  L.  R. 
2100. 

It  is  the  duty  of  an  employer  in  taking  a  bond  for  the 
honesty  and  fidelity  of  an  employee  to  disclose  to  the  sure- 
6 


82  rilK   I,A\V    OK   FIDKI.I TV    BONDS. 

tics  llicr(()ii  I  he  ('iii])l(>ycf's  knowicdgc  of  ])ast  iiiisappro- 
])riatioii.s  of  iiioiicv  aiiioiuiting  to  criminality  on  the  part 
of  siu'li  ciiiployoo,  and  if  sucli  disolosiirc  is  not  made  or  is 
concoalcMl  the  sureties  are  not  liable,  unless  they  in  fact 
had  knowledge  or  information  concerning  such  misappro- 
])riations  when  they  signed  and  delivered  such  bond. 

Conn.  Gen.  Life  Ins.  Co.  vs.  Chase,  72  Vt.  176. 

Laucr  Brewing  Company  vs.  Riley,  195  Pa.  St.  449 

63  Am.  St.  Rep.  335. 

Wayne  vs.  Com.  Nat.  Bank,  52  Pa.  St.  343. 

Third  Natl.  Bank  vs.  Owen,  101  Mo.  558. 

Belleview  L.  k  B.  Assn.  vs.  Jeckel,  105  Ky.  159. 

Deposit  Bank  vs.  Hearne,  104  Ky.  819. 

Atlas  Bank  vs.  Brownell,  9  R.  I.  168. 

Bolz  vs  Stuhl,  4  Pa.  Super.  Ct.  52. 

U.  S.  Life  Ins.  Co.  vs.  Salmon,  157  N.  Y.  682. 

Drabek  vs.  Grand  Lodge,  24  111.  App.  82. 

Traders  Ins.  Co.  vs.  Hecker,  67  Minn.  106. 

Capital  Fire  Ins.  Co.  vs.  Watson,  76  Minn.  387. 

Sooy  vs.  State,  39  N.  J.  L.  135. 

Commonwealth  B.  6c  L.  Co.  vs.  Fromlet,  7  Ohio,  n.  s. 
194. 

But  in  the  absence  of  inquiry  from  a  surety,  held  the  cred- 
itor is  not  bound  to  connnunieate  to  him  all  the  circumstances 
that  may  affect  the  undertaking:. 

Lake  vs.  Thomas,  84  Md.  608. 

If  the  obligee  in  a  bond  given  to  secure  the  faithful  per- 
formance of  the  duties  of  an  agent  knows  at  the  time  of  the 
execution  of  the  bond  that  the  agent  is  a  defaulter,  and 
conceals  the  fact  from  the  sureties,  such  concealment  is  a 
fraud  upcm  the  sureties,  and  discharges  them  from  liability 
on  the  bond. 

Guardian  Fire  Assn.  Co.  vs.  Thompson,  68   Calif. 

208 
Harrison  vs.  Lumbermen  Ins.  Co.,  8  Mo.  App.  37. 


FEAUD   IX    PROCURING   BOND.  83 

Whoever  becomes  answerable  for  another  is  entitled  to 
suppose  that  the  transaction  is  in  the  usual  course  of  busi- 
ness, and  will  not  subject  him  to  extraordinary  risks  that 
could  not  have  been  anticipated.  In  such  cases  entire  good 
faith  is  due  to  the  surety,  and  if  any  fact  material  to  his 
interest  increasing  his  responsibility  be  concealed  from  him 
it  will  operate  to  relieve  him. 

Mumford  vs.  M.  &  C.  R.  R.  Co.,  2  Tenn.  393. 

Wilmington,  C.  &  A.  R.  R.  Co.  vs.  Ling,  18  S.  C. 
116. 

Any  concealment  from  a  surety  by  the  creditor  of  mate- 
rial facts,  or  any  express  or  implied  misrepresentation  of 
facts,  or  any  undue  advantage  taken  of  the  surety  by  the 
creditor,  either  by  surprise  or  by  withholding  proper  infor- 
mation will  furnish  sufficient  ground  to  invalidate  the  con- 
tract. 

First  ISTat.  Bank  of  Stanford  vs.  Mattingly,  92  Ky. 

651. 
Screwmen's  Ben.  Assn.  vs.  Smith,  70  Tex.  168, 

It  is  fraud  in  law  if  a  party  makes  representations  which 
he  know^s  to  be  false,  and  injury  ensues,  although  the  mo- 
tive from  which  the  representations  proceeded  may  not  have 
been  bad. 

Drabek  vs.  Grand  Lodge,  24  111.  App.  82. 

A  surety  is  prejudiced  by  the  risk  assumed  by  reason  of 
the  non-disclosure  of  the  fact  that  the  principal  for  want 
of  integrity,  is  not  entitled  to  confidence  in  the  relation 
which  hi>,  surety  as  such  is  induced  to  assume  to  him ;  such 
concealment  is  deemed  fraudulent,  and  everything  short  of 
that  is  insufficient  to  avoid  the  obligation  of  the  surety. 
Ludekens  vs.  Pscherhofer,  76  Hun.  (IST.  Y.)  548. 

When  with  the  knowledge  and  assent  of  the  creditor  there 
is  a  misrepresentation  with  regard  to  material  facts,  and 


84  TilE  LAW   Oh'  FJDKLITV   BONDS. 

liad  tlie  real  facts  been  known  and  not  misstated  they  might 
reasonably  have  prevented  the  security  from  entering  into 
his  contract  of  suretyshi}),  such  contract  will  not  be  binding 
on  the  surety,  though  such  misrepresentation  was  not  made 
with  a  fraudulent  purpose. 

If  a  material  fact  connected  with  the  contract  of  surety- 
ship which  might  influence  the  surety  in  entering  into  the 
contract,  is  fraudulently  concealed  with  a  view  to  benefit 
the  creditor,  such  concealment,  though  no  inquiry  is  made 
by  the  surety,  would  discharge  him. 

Warren  vs.  Branch,  15  W.  Va.  21. 

63. — Same. 

If  a  party  designedly  misrepresent  a  material  fact  which 
it  was  his  duty  to  disclose,  and  upon  which  the  other  party 
had  a  right  to  rely,  and  did  rely,  for  the  purpose  of  mis- 
leading and  deceiving  the  other  party  to  his  injury,  he  is 
guilty  of  a  positive  fraud,  which  will  authorize  the  de- 
ceived party  to  avoid  the  contract  entered  into,  in  conse- 
quence of  the  misrepresentation. 

Jones  vs.  Emory,  40  N.  H.  348. 

An  agent  of  an  insurance  company  who  has  been  guilty 
of  embezzling  funds  of  the  company  was  appointed  agent 
of  a  new  company  formed  with  the  same  stockholders  and 
officers,  the  new  company  taking  a  bond  for  the  faithful 
performance  of  the  duties  of  such  agent.  The  new  com- 
pany having  knowledge  of  his  former  embezzlement,  failed 
to  give  the  sureties  on  the  bond  notice  thereof.  Held,  the 
sureties,  having  no  knowledge  of  the  former  acts  of  embez- 
zlement, were  not  liable  on  the  bond. 

Ind.  &  Ohio  Live  Stock  Ins.  Co.  vs.  Bender,  32  Ind. 
App.  287. 

The  failure  of  the  general  agent  of  an  insurance  com- 
pany, who  required  a  sub-agent  to  execute  a  bond  for  the 
prompt  payment  of  all  moneys  collected  by  him  in  the 


FRAUD   IN    PEOCUKINO   BOND,  85 

business  of  his  agency,  to  inform  tlie  sureties  at  the  time 
they  executed  the  bond  that  the  sub-agent  was  then  largely 
indebted  to  his  principal  on  account  of  funds  embezzled  by 
him,  which  fact  was  known  to  the  general  agent,  relieves 
the  sureties  from  liability  on  the  bond. 

But  the  mere  failure  of  the  obligee  in  such  case  to  inform 
the  sureties  in  the  absence  of  inquiry  that  their  principal 
had  fallen  behind  in  his  accounts  until  at  the  time  of  the 
execution  of  the  bond  he  was  considerably  indebted  to  the 
obligee,  does  not  relieve  the  sureties  from  liability  if  such 
undisclosed  acts  of  the  principal  do  not  involve  moral  tur- 
pitude, but  are  such  as  are  consistent  with  honesty,  and 
only  tend  to  show  that  he  is  negligent,  dilatory  or  un- 
skilled. 

Hebert  vs.  Lee,  118  Tenn.  133. 

To  the  same  effect  is — 

Home  Ins.  Co.  vs.  Holway,  55  Iowa,  571. 
See  also — 

Palatine  Ins.  Co.  vs.  Crittenden,  18  Mont.  413. 

The  obligee  in  a  surety  bond  is  not  required  to  aid  the 
surety  in  determining  the  desirability  of  the  contract  of 
indemnity  nor  to  warn  him  against  risk  where  all  the  facts 
are  as  accessible  to  one  as  the  other,  whether  the  surety  be 
present  or  absent,  unless  the  circumstances  of  the  case  are 
such  that  silence  on  the  part  of  the  obligee  would  amount 
to  an  intentional  fraud  or  deception. 

Sherman  vs.  Harbin,  125  Iowa,  174. 

The  omission  of  the  obligee  to  advise  the  surety  upon 
a  bond  of  indemnity  of  the  refusal  of  another  to  go  upon 
such  a  bond  as  a  surety  because  he  considered  the  obligor 
untrustworthy,  is  not  of  itself  a  defense  to  an  action  brought 
against  such  surety  upon  the  bond. 

Ludekens  vs.  Pscherhofer,  76  Hun.  (W.  Y.)  548. 


8(5  TIIK  LAW  OF  FIDKLITY   BONDS. 

Hut  sec  I  iiipcriiil  lliiildiiii;  v.V  l.iiiiii  (V».  vs.  Initcvl  States 
Fidclitv  \-  (liiiiraiitv  ('<>inj)iniy,  .'!  ()lii(i  ("ir,  Ct,  ii.  s.  '>85, 
where  a  false  stateiiieiit  liv  oMiuce  as  to  such  fact  held  to  re- 
lease the  surety. 

64. — Same. 

To  render  the  defense  of  conceahnent  sufficient  in  an 
action  by  a  creditor  against  a  surety  it  is  necessary  to  aver 
that  the  creditor  either  procured  the  surety's  signature,  or 
was  present  when  the  instrument  was  executed,  and  then 
niisreprcocnted  or  concealed  essential  facts  which  should 
have  been  disclosed. 

Magee  vs.  Manhattan  Life  Ins.  Co.,  92  U.  S.  93. 

The  sureties  of  an  officer  of  a  corporation  are  not  relieved 
from  liability  on  account  of  the  fact  that  the  officer  was  a 
defaulter  when  the  bond  was  given,  where  the  officers  of 
the  corporation  had  no  knowledge  of  such  fact.    Their  mere 
negligence,  in  the  absence  of  fraudulent  representations  or 
concealment,  will  not  discharge  the  sureties. 
Bennett  vs.  Association,  57  Tex.  72. 
First  Xatl.  Bank  vs.  Fidelity  &  Guaranty  Co.,  110 
Tenn.  10. 

This  decision  must  be  taken  with  certain  allowances.  It 
is  based  on  the  old  case  of  Tapley  vs.  Martin,  116  Mass.  275, 
and  Guarantee  Co  vs.  Mechanics'  Bank,  80  Fed.  706,^  subse- 
quently reversed. 

It  is  no  defense  that  the  surety  of  a  bank  teller  was  in- 
duced to  become  such  surety  by  reason  of  the  published  re- 
port of  the  bank  immediately  before  he  became  surety, 
showing  its  re.'?ources  and  liabilities  which  were  false. 

1. — See  note  to  Chap.  2.  sec.  53. 


FRAUD    IjS'    PEOCURIXG   EOI^D. 


87 


Such  publication  has  uo  relation  to  such  suretyship,  nor 
does  it  disclose  whether  the  teller  is  honest  or  dishonest. 

Lieberman  vs.  First  Xatl.  Bank,  2  Penu.  (Del.)  416. 

Held,  however^  in  Graves  vs.  Lebanon  Bank,  73  Ky.  23, 
that  such  a  publication  having  been  published  and  seen  and 
relied  on  by  sureties,  the  latter  were  discharged.  That  was 
an  early  case  and  would  not  now  be  followed;  certainly  not 
in  the  case  of  a  corporate  surety.  If  that  were  the  law,  it 
would  be  difficult  or  impossible  for  any  bank  to  collect  on 
any  bond  where  there  was  an  undiscovered  default  at  the 
time  the  bond  was  executed. 

65. — Same. 

If,  in  fact,  an  officer  of  a  corporation  whose  fidelity  is 
insured  sustained  other  relations  to  the  company  than  those 
indicated  in  its  statement  on  which  the  bond  was  executed, 
and  which  were  essentially  different,  and  involved  the  re- 
ceipt and  expenditure  of  the  employer's  money,  the  failure 
to  disclose  such  relations  is  a  defense  to  liability  of  the 
surety  company  on  its  bond. 

Issaquah  Coal  Co.  vs.  United  States  Fidelity  &  Guar. 
Co.,  126  Fed.  89. 

Where  a  fidelity  bond  provided  that  any  'Svillful  mis- 
statement" or  suppression  of  fact  by  the  employer  in  his 
statemenr  or  declaration  concerning  the  employed  should 
render  the  bond  void  from  the  beginning,  the  phrase  "will- 
ful misstatement"  was  intended  to  mean  any  material  false 
statemen'  made  with  knowledge  of  its  falsity,  voluntarily, 
and  not  inadvertently,  and  hence  an  instruction  that  the 
bond  was  not  avoided  unless  the  misstatements  were  made 
'Svith  intent  to  secure  renewals  of  the  bond"  was  erroneous. 
Fidelity  (fc  Casualty  Co.  of  Xew  York  vs.  Bank  of 
Timmonsville,  139  Fed.  101. 


88  TJIK  J. AW    OK   JIDKLIIV    UO.NDS. 

The  coii('(;iliiiciit  Iroiii  .surt'ties  of  the  cashier  of  a  bank 
of  the  fact  that  the  predecessor  of  the  cashier  had  been  a 
defaulter  did  not  affect  their  liability;  nor  did  the  conceal- 
ment by  the  directors  of  prior  misconduct  of  the  cashier 
while  occupying  the  position  of  teller,  where  such  conduct 
did  not  affect  the  moral  character  or  official  fidelity  of  the 
employee. 

Bostwick  vs.  Van  Voorhis,  91  N.  Y.  353. 

Under  a  bond  guaranteeing  payment  for  shipments  of 
goods  to  an  agent,  it  was  held  that  the  failure  of  the  agent 
to  pay  cash  for  any  shipment  was  a  breach  of  contract  enti- 
tling his  principal  to  proceed  against  him  and  his  sureties 
to  enforce  the  collection  of  the  debt  then  due,  and  hence 
his  sureties  were  entitled  to  call  on  authorized  agents  of 
his  principal  for  information  as  to  the  state  of  his  accounts, 
and  if  by  their  misrepresentations  the  sureties  changed  their 
position  to  their  detriment,  they  were  discharged  from  lia- 
bility. 

St.  Louis  Brewing  Assn.  vs.  Hayes,  107  Ped.  395. 

See  note  on  liability  of  surtev  upon  instrument  obtained 
by  fraud  or  niisre]ircsGntation — 
21  L.  R.  A.  409. 

In  an  action  on  a  bank  teller's  bond  for  losses  sustained 
by  the  bank,  a  plea  set  up  that  the  bank  induced  defendant 
surety  to  execute  the  bond  by  false  representations  that  the 
teller  never  was  in  arrears  or  default  to  the  bank,  and  that 
his  books  and  accounts  had  been  examined  a  short  time  be- 
fore, and  found  to  be  correct.  Held,  that  such  a  plea  was 
allowed  under  the  Code  of  Virginia,  enabling  fraud  in  the 
procuring  of  a  sealed  contract  to  be  set  up  as  a  defense, 
and  that  it  constituted  a  valid  defense,  whether  or  not  the 


FEAUD   IN   PEOCUEING   BOND.  89 

bank  believed  the  representations  to  be  true  when  it  made 
them. 

Guarantee   Co.   of   N".   A.  vs.   First   ISTat.   Bank  of 
Lynchburg,  95  Va.  480. 

66. — Rule  Inapplicable  to  Government  or  Other  Sovereign   Body. 

It  may  be  remarked  in  passing  that  the  acts  or  omissions, 
negligence,  concealment,  false  representations,  fraud  or  wrong- 
doing of  Government,  State,  Municipal  and  County  officials 
will  not  operate  to  discharge  the  sureties  from  liability  on 
the  bonds  of  other  such  officials.  With  a  few  apparent  excep- 
tions, this  proposition  is  supported  by  a  long  line  of  undis- 
puted authority.  As  said  by  Judge  Sharswood,  the  sureties 
in  such  a  case  guarantee  that  their  principal  shall  be  honest, 
though  all  about  him  are  rogues. 

For  further  discussion  on  this  point,  see  Chapter  4,  on 
ITegligence,  where  the  authorities  are  collected. 

ISTot  only  will  passave  conduct  on  the  part  of  other  officials, 
such  as  failure  to  notify  a  prospective  surety  of  the  fact  that 
the  principal  is  in  default,  or  failure  to  examine  his  accounts 
as  required  by  law,  not  relieve  the  sureties,  but  even  active 
conduct  on  their  part,  such  as  would,  between  private  indi- 
viduals, amount  to  fraud  and  vitiate  the  policy,  will  like- 
wise not  relieve  them.  Thus,  where  a  public  official  is  ap- 
plied to  by  prospective  sureties  for  information  as  to  the 
accounts  of  the  party  to  be  bonded,  and  such  official  fails  to 
inform  the  sureties  that  the  party  is  then  in  default,  or  con- 
ceals such  fact,  or  fails  to  furnish  other  information  mate- 
rial to  the  risk,  or  furnishes  false  information,  and  the  sure- 
ties are  misled  thereby,  in  all  such  cases  the  sureties  are  lia- 
ble under  their  undertakings. 

Sooy  vs.  State,  39  K  J.  L.  135. 
State  vs.  Bates,  36  Vt.  38Y. 
McLean  vs.  State,  8  Tenn.  22. 


00  IIIK    I. AW    ()]'•    KIDKJ.I  TV    Uo.NDS. 

('(Hiiiiiniiwcalth  \-s.  Am.  Jionding  ^  T.  Co.,  205 
I'a.  St.  ;5Tl'. 

JJowcr  vs.  Washing-ton  Co.,  25  Pa.  St.  G!J. 

State  vs.  Hushing,  17  Fla.  220. 

Anderson  vs.  P,hiir,  121  Ga.  120. 

I'liited  States  Fidelity  cV  Guaranty  Co,  vs.  Com- 
monwealth, :n  Ky.  L.  11.    1170. 

Stoecklc  vs.  Armstrong,  8  Dei.  Ch.  150. 

Hoitt  vs.  Holcomb,  23  X.  H.  535. 

Detroit  vs.  Weber,  2G  Mich.  284. 

Judge  Cooley  wrote  a  vigorous  dissenting  opinion  in  the 
iast-nientioned  case,  against  the  proposition  that  the  misrep- 
resentations of  a  City  Comptroller,  made  to  sureties,  before 
the  execution  of  their  bond,  would  have  no  effect  upon  the 
liability  thereon. 

Held,  in  Wilson  vs.  Town  of  Monticello,  85  Tnd.  11,  that 
an  answer  by  sureties  of  an  agent  of  a  municipal  corporation 
for  the  sale  of  municipal  bonds,  that  the  plaintiff  knew  and 
concealed  from  them  the  fact  that  the  agent  had,  before  the 
bond  was  executed,  disposed  of  the  securities  not  returned, 
and  also  represented  to  them  that  he  then  had  them  in  his 
hands,  whereby  they  wer(>  deceived  and  induced  to  become 
sureties,  was  a  good  defense. 

67. — Further  References, 

Further  reference  may  be  made  to  Chapter  2,  on  Repre- 
sentations and  Warranties,  for  review  of  authorities  relating 
to  written  statements  by  ])ublic  officials  made  to  corporate 
sureties  by  way  of  proposals  for  bonds  of  other  officials. 

Reference  may  also  be  made  to  Chapter  7  on  the  subject 
of  corporate  fidelity  bonds  filed  in  place  of  statutory  or  other 
official  bonds. 


FRAUD   IN    PKOCUKING   BOND.  .  91 

68. — Private  Corporations. 

Whether  the  negligence  or  fraud  of  one  officer  or  agent 
of  a  private  corporation  will  operate  to  discharge  the  sure- 
ties of  another  officer  or  agent  is  ojDen  to  some  doubt.  The 
weight  of  authority  undoubtedly  is  in  favor  of  the  proposi- 
tion that  the  acts  or  omissions  or  knowledge  of  an  officer  or 
agent  of  a  corporation — certainly  so  in  the  case  of  an  execu- 
tive officer — are  the  acts  or  omissions  or  knowledge  of  the 
corporation,  and  hence  binding  upon  it,  releasing  the  sureties 
of  another  officer  or  agent  in  all  such  cases  as  they  would  be 
released  as  between  private  parties.  But  there  is  a  respecta- 
ble line  of  cases  holding  sureties  to  the  same  accountability 
as  in  the  case  of  Government  sureties.  (See  review  of  the 
authorities  on  both  propositions  in  Chapter  4,  sec.  86  et.  seq. 


92 


TIIK   LAW   OF  I-'IDELITV   BONDS. 


CHAPTER  IV. 


LACHES    OR    INDULGENCE    BY    OBLIGEE. 


09.     Effect  of,  after-execution  of 
bond. 

70.  Effect  of  the  failure  of  the 

obligee  to  notify  the  sure- 
ty of  the  delinquency  of 
the  principal — Digest  of 
authorities. 

71.  Same. 

72.  Rule  of  good  faith  continu- 

ous. 

73.  Liability   of   the   surety   for 

defaults  of  the  principal 
committed  after  knowl- 
edge by  the  obligee  of 
prior  default  not  com- 
municated to  the  surety. 

74.  Digest  of  authorities. 

75.  Same. 

76.  Effect  of  dealings  with  or  in- 

dulgence to  the  principal 
by  the  obligee  without  the 
knowledge  and  consent  of 
the  surety — Digest  of  au- 
thorities. 

77.  Same. 


Laches   or   Negligence   of  the 
Obh'gee   Generally. 

78.  (o)   United    States    Govern- 

ment. 

79.  Digest    of    authorities    illus- 

trative of  rule. 
SO.     Same. 

81.  (&)    State,      municipal      and 

other  public  corporations. 

82.  Digest  of  authorities. 
S3.     Same. 

84.  Same. 

85.  Same — Against  the  rule. 

86.  (c)   Private  corporations. 

87.  Leading  case. 

88.  Same — Discussion. 

89.  Leading    case   supported    by 

following  authorities. 

90.  Same. 

91.  Authorities    against    rule   as 

adopted  in  Shaeffer  case. 


69. — Effect  of  After  Execution  of  Bond. 

In  the  first  Chapter  consideration  ^vas  given  to  the  con- 
struction of  corporate  fidelity  bonds  irenerally;  in  the  second, 
to  representations  and  "warranties,  particularly  applicable  to 
snch  bonds:  in  th(^  third,  to  the  acts,  omissions  or  condnct  of 
the  obligee  at  the  time  of  or  pnor  to  the  execution  of  the 


LACHES  OR  INDULGENCE  BY  OBLIGEE.  93 

bond,  whether  such  bond  be  executed  by  a  corporation  or 
individual.  We  come  now,  chronologically  and  logically,  to 
consider  matters  affecting  the  risk  after  the  execution  of  the 
instrument,  and  herein: 

First.  Of  the  effect  of  the  failure  of  the  obligee  to  notify 
the  surety  of  the  delinquency  of  the  principal ; 

Second.  Of  the  liability  of  the  surety  for  defaults  of  the 
principal  committed  after  knowledge  by  the  obligee  of  prior 
default  not  communicated  to  the  surety;  and. 

Third.  Of  the  effect  of  dealings  with  or  indulgence  to  the 
principal  by  the  obligee  without  the  knowledge  and  consent 
of  the  surety. 

Fourth.  Laches  or  negligence  of  the  obligee  generally. 

70. — Effect  of  the  Failure  of  the  Obligee  to  Notify  the  Surety  of 
the  Delinquency  of  the  Principal — Digest  of  Authorities. 

Where  a  bond  insuring  a  bank  against  such  pecuniary 
loss  as  it  might  sustain  by  reason  of  the  fraudulent  acts  of 
its  teller  contained  a  provision  that  the  company  would 
notify  the  insuring  company  on  "becoming  aware"  of  the 
teller  "being  engaged  in  speculation  or  gambling,"  it  is  the 
duty  of  the  bank  to  give  such  notice  when  informed  that 
the  teller  is  speculating,  although,  while  confessing  the  fact 
of  speculating,  he  asserts  that  he  has  ceased  to  do  so. 

A  bank  cannot  recover  on  the  bond  of  its  teller  for  his 
fraudulent  acts  after  it  has  received  information  of  his  be- 
ing engaged  in  speculation,  which  information  is  not  con- 
veyed to  the  surety  as  required  by  the  bond. 

Guarantee   Co.   of   N".   A.   vs.   Mechanics'    Savings 
Bank,  183  TJ.  S.  402. 


J>-l  TIIK    LAW    OF    KIUKUrV    BONDS. 

The  failure  ol"  the  employer  to  report  a  single  delin- 
quency to  a  bonding  company  is  not  such  an  act  as  would 
release  sach  company  iukIci-  a  fidelity  bond. 

American  Bonding  tV  Trust  Co.  vs.  Xew  Amsterdam 
Cas.  Co.,  125  111.  App.  33. 

He  who  commits  the  first  substantial  breach  of  a  con- 
tract cannot  maintain  an  action  against  the  other  contract- 
ing party  for  a  subsequent  failure  to  perform. 

Kice  vs   Fidelity  &  Deposit  Co.,  103  Fed.  427. 

Natl.  Surety  Co.  vs.  Long,  125  Fed.  887. 

A  surtey  is  discharged  if  a  condition  known  to  the  obli- 
gee, upon  which  the  surety  agreed  to  be  bound,  is  not  com- 
plied with. 
Ihid. 

Though  the  officers  of  a  company  may  have  reason  to 
knoAv  and  believe  that  the  secretary  had  failed  in  his  duty 
to  pay  over  money  to  the  treasurer  of  the  company  and 
failed  to  communicate  that  fact  to  the  sureties,  yet  unless 
there  was  fraud — an  actual  intent  to  conceal  or  culpable 
negligence — the  sureties  would  not  be  released  from  their 
liability. 

Anaheim  Water  Co.  vs.  Parker,  101  Calif.  488. 

The  failure  of  the  officers  of  a  railroad  company  to  in- 
form the  sureties  of  a  general  freight  and  ticket  agent  of 
the  fact  that  he  did  not  make  monthly  settlement  as  re- 
quired by  the  rules  of  the  company  will  not  release  the  sure- 
ties of  such  employee  where  there  is  no  fraudulent  conceal- 
ment of  the  facts. 

Kichmond  c<t  P.  P.  P.  Co.  vs.  Kasey,  30  Grat.  218. 

The  failure  of  the  directors  of  a  bank  to  give  notice  of 
the  dishonesty  of  a   cashier,  if  the  same  were  known  to 


LACHES  OR  INDULGENCE   BY  OBLIGEE.  95 

them,  to  the  sureties  on  his  bond,  and  his  retention  in  office, 
did  not  release  the  sureties,  the  failure  of  one  officer  of  a 
corporation  to  discharge  his  duty  not  releasing  the  sureties 
of  another  from  responsibility  for  the  defaults  of  the  latter. 

McShane  vs.  Howard  Bank,  73  Md.  135. 

Morris  Canal  &  Banking  Co.  vs.  Van  Vorst,  1  Zab. 
(K  J.)  100. 

The  retention  of  a  bonded   agent   in  the  service  of  an 
employer  after  knowledge  of  a  default  will  not  discharge 
the  surety  from  liability  for  a  prior  default. 
Lake  vs    Thomas,  84  Md.  608. 

A  failure  to  give  notice  to  guarantors  of  the  default  of 
their  principal,  excej^t  in  cases  governed  by  commercial 
rules,  is  a  matter  of  defense,  and  resulting  damages  must 
concur  with  such  failure  in  order  to  w^ork  a  discharge. 

LaRose  vs.  Logansport  ISTat.  Bank,  102  Ind.  332. 

The  failure  of  a  bank  to  notify  to  the  sureties  of  a  book- 
keeper his  delinquency  as  soon  as  discovered  will  not  re- 
lieve them  from  their  obligation. 

Planters'  Bank  vs.  Lamkin  R.  M.  C.  (Ga.)  29. 

The  contract  of  a  surety  imports  entire  good  faith  be- 
tween him  and  the  creditor,  which  must  be  kept  inviolate  in 
all  subsequent  dealings  betAveen  the  creditor  and  the  prin- 
cipal debtor ;  but  the  term  is  relative,  and  in  determining 
whether  it  has  been  exercised  the  particular  facts  of  each 
case  must  be  considered. 

As  a  general  rule,  if  the  creditor  does  any  act  injurious 
to  the  surety,  or  inconsistent  with  his  rights,  or  omits,  when 
required  by  the  surety,  to  do  any  act  which  duty  enjoins 
on  him,  rind  the  surety  is  thereby  injured,  in  all  such  cases 
the  surety  is  discharged. 

White  vs.  Life  Assn.,  63  Ala.  419. 


9C  TlIK  I,A\V   OK  FIDELITY   BONDS. 

The  Tact  tliaL  an  ciuploycr,  ai'lcr  discovering  in  April 
the  employee's  breach  of  duty,  retained  him  in  his  service 
until  September^  will  not  release  the  sureties. 

Socialistic  Co.  of  Pub.  Assn.  vs.  Hoffman,  33  X.  Y. 
Supp.  695. 

71. — Same. 

A  local  statute  provides  that  the  treasurer  of  every  sav- 
ings bank  sball  at  least  once  in  every  six  years  give  a  new 
bond  in  i)  sum  of  not  less  than  $10,000,  payable  to  the  bank 
and  acceptable  to  its  directors.  Held,  that  the  bond  Avas 
required  not  for  the  benefit  of  the  directors,  but  for  the 
protection  of  the  public  in  its  dealings  with  the  bank,  and 
therefore  the  failure  of  the  directors  to  inform  the  sure- 
ties upon  a  new  bond  that  the  treasurer  had  already  misap- 
propriated moneys  of  the  bank  would  not  relieve  sureties 
from  liability  for  his  subsequent  defalcation;  nor  would 
they  be  released  under  such  circumstances,  even  if  the  di- 
rectors' failure  to  disclose  were  to  be  treated  as  the  fraudu- 
lent concealment  of  a  material  fact. 

As  a  rule,  the  mere  non-disclosure  of  a  fact  does  not 
amount  to  fraud,  unless  the  party  remaining  silent  was 
called  upon  by  the  other  to  disclose  all  material  facts,  or 
his  relation  to  the  other  was  such  as  to  make  it  his  legal 
or  equitable  duty  to  disclose. 

WatertoAATi  Savings  Bank  vs.  Mattoon,  78  Conn.  388. 

The  mere  failure  of  the  obligee  in  the  bond  of  a  general 
agent  of  an  insurance  company  to  notify  the  sureties  of  the 
default  of  the  principal  will  not  discharge  them. 

Phoenix  Mutl.  Life  Ins.  Co.  vs.  Holloway,  51  Conn. 
310. 

The  failure  of  an  insurance  company  to  notify  the  sure- 
ties on  its  agent's  fidelity  bond  of  its  agent's  default,  and 
the  continuance  of  the  agent  in  the  employ  of  the  company 


LACHES  OB  liSTDULGENCE   BY  OBLIGEE.  97 

after  default,  would  not  relieve  the  sureties  on  the  bond 
from  liability  for  such  default. 

Boyd  vs.  Agricultural  Ins.  Co.,  20  Col.  App.  28.  • 

To  discharge  the  surety,  the  act  of  the  creditor  must  be 
injurious  to  the  legal  rights  of  the  surety,  hence  the  failure 
of  the  creditor,  in  the  absence  of  contractual  obligation,  to 
advise  the  surety  of  delinquencies  of  the  principal  of  which 
he  had  had  knowledge  for  three  years,  will  not  discharge  the 
surety.     Mere  indulgence  is  not  sufficient. 

Wilkenson  vs.  Crescent  Ins.  Co.,  64  Ark.  80. 

Though  the  officers  of  a  company  may  have  had  reason 
to  know  and  believe  that  the  secretary  had  failed  in  his 
duty  to  pay  over  money  to  the  treasurer  of  the  company, 
and  failed  to  communicate  that  fact  to  the  sureties,  yet 
unless  there  was  fraud — an  actual  intent  to  conceal,  or  cul- 
pable negligence — the  sureties  would  not  be  released  from 
their  liability. 

Anaheim  Water  Co.  vs.  Parker,  101  Calif.  483. 

72. — Rule  of  Good  Faith  Continuous. 

The  rule  requiring  good  faith  on  the  part  of  the  obligee 
toward  the  surety  does  not  cease  to  be  operative,  upon  exe- 
cution of  the  suretyship,  yet  some  of  the  cases  cited  above 
would  seem,  in  effect,  to  so  hold.  In  other  words,  carrying 
out  the  theory  of  these  cases,  the  prospective  obligee  must 
deal  with  the  party  who  is  about  to  become  surety  with  en- 
tire good  faith,  and  must  not  make  misrepresentations  of 
facts  material  to  the  risk,  or  conceal,  upon  inquiry  or  oppor- 
tunity, such  facts ;  but  as  soon  as  the  surety  has  bound  him- 
self upon  the  instrument,  the  obligee  may  conceal  or  negli- 
gently fail  to  notify  the  surety  of  the  most  important  fact 
which  could  affect  his  undertaking,  to  wit,  the  default  or 
dishonesty  of  the  principal.  This  proposition,  theoretically 
7 


1)8  rilK    LAW    OF   FIDKI.ITY    UOXDS. 

at  least,  is  ik.I  law;  ii('\ (■rihclcss  iIr-  cases  so  holding  are  of 
sufficient  imiiihci-  and  iminn-tancc  to  raise  a  grave  doubt,  in 
])ractice,  as  to  wliat  rule  will  Ix-  applied  in  a  given  instance. 
The  cases  are  here  collected.  Thcv  will  he  found  more  or 
less  in  conflict  with  the  line  of  authority  referred  to  in  the 
followinj;-  snh  title: 

73. — Liability  of  the  Surety  for  Defaults  of  the  Principal  Com- 
mitted After  Knowledge  by  the  Obligee  of  Prior  Default 
Not  Communicated  to  the  Surety. 

In  the  preceding  sub-title  reference  was  to  the  question 
whether  the  failure  of  the  obligee  to  notify  the  surety  of  dis- 
honesty or  default  of  the  employee  avoids  the  contract.  Ref- 
erence hero  is  to  the  question  as  indicated  in  the  title, 
whether  the  surety  is  liable  for  defaults  of  his  principal  com- 
mitted after  a  previous  delinquency  materially  affecting  the 
contract  and  known  to  but  not  communicated  by  the  obligee 
to  the  surety. 

The  leading  case  upon  the  subject  is  Phillips  vs.  Foxall, 
L.  R.  7  Q.  B.  666  (1872),  holding  as  follows: 

In  the  case  of  a  continuing  guaranty  for  the  honesty  of 
a  servant,  if  the  master  discovers  that  the  servant  has  been 
guilty  of  acts  of  dishonesty  in  the  course  of  the  service  to 
which  the  guaranty  relates,  and  if  instead  of  dismissing  the 
servant,  as  he  may  do  at  once,  and  without  notice,  he 
chooses  to  continue  in  his  employ  a  dishonest  servant,  with- 
out the  knowledge  and  consent  of  the  surety,  express  or 
implied,  he  cannot  afterwards  have  recourse  to  the  surety  to 
make  good  any  loss  which  may  arise  from  the  dishonesty 
of  the  servant  during  the  subsequent  service. 

(To  the  same  effect  is  Sandei*son  vs.  Ashton,  L.  R.  S 
Exch.  73.) 


LACHES  OR  INDULGENCE  BY  OBLIGEE.  99 

This  case,  says  the  Supreme  Court  of  Alabama,  has  been 
generally  followed  by  the  American  Courts  and  nowhere 
abstractly  doubted. 

Saint  vs.  Wheeler  &  Wilson  Mfg.  Co.,  95  Ala.  36. 

74. — Digest  of  Authorities. 

Action  on  bond  of  R.  as  agent  of  insurance  company. 
At  the  time  of  the  execution  of  the  bond  R.  &  C,  who  had 
prior  thereto  been  agents  of  the  company,  were  liable  for 
more  than  $21,000  on  their  agency,  but  this  fact  was  un- 
known to  sureties.  The  sureties  could  by  the  use  of  proper 
business  diligence  have  discovered  the  fact. 

Held,  the  sureties  were  entitled  to  good  faith  at  the  hands 
of  the  obligee,  and  no  more.  But  after  the  bond  was  exe- 
cuted, when  the  company  discovered  the  defalcation  of  R. 
&  C.  it  was  their  duty  to  at  once  notify  the  sureties  of  the 
fact.  The  sureties  cannot  be  held  bound  to  the  company 
for  any  failure  of  duty  by  R.  after  the  company  discovered 
the  defalcation  mentioned  and  failed  to  disclose  it  to  the 
sureties. 

Conn.  Mutl.  Life  Ins.  Co.  vs.  Scott,  81  Ky.  540. 

The  agent  of  a  corporation,  being  under  bond  to  account 
and  pay  over  daily,  cannot  be  trusted  with  more  money  at 
his  surety's  risk  after  dishonesty  of  the  agent  is  discovered 
by  the  corporation.  But  he  may  be  so  trusted  so  long  as 
the  circumstances,  fairly  interpreted,  point,  not  to  moral 
turpitude,  but  to  a  want  of  diligence  or  punctuality  rather 
than  to  a  want  of  integrity. 

Charlotte  C.  &  A.  R.  R.  Co.  vs.  Gow,  59  Ga.  685. 

Atena  Tns.  Co.  vs.  Fowler,  108  Michigan,  557. 

Atlantic  &  Pac.  Co.  vs.  Barnes,  64  N.  Y.  385. 

See  also — 

Bostwick  vs.  Van  Yoorhis,  91  N".  Y.  353. 


100  TJIE  LAW   OF  FIDELITY   BOXDS. 

As  indicated  above,  llie  rule  has  no  application  to  cases  of 
mere  breaches  of  duty  or  contract  obligations,  not  involving 
dishonesty  ou  his  part,  or  fraud  or  concealment  on  the  part 
of  the  master. 

Lancashire  Ins.  Co.  vs.  Callahan,  G8  Minn.  277. 

Where  the  employer  of  a  clerk  or  other  agent  takes  from 
another  a  bond  of  indemnity,  or  an  undertaking  to  become 
responsible  for  the  honesty  and  fidelity  of  such  clerk  or 
agent  in  his  service,  the  employer  impliedly  stipulates  that 
he  will  not  knowingly  retain  such  clerk  or  agent  in  his  serv- 
ice after  a  breach  of  the  guaranty  justifying  his  discharge, 
and  if  he  retains  him  after  such  breach,  the  surety  will  not 
thereafte:.'  he  liable. 

Rapp  vs.  Phcenix  Ins.  Co.,  113  111.  390. 

The  sureties  on  a  hond  for  the  faithful  performance  of 
the  duties  of  an  agent  are  relieved  from  liability  for  the 
subsequent  defaults  of  the  agent,  if  the  principal  continues 
the  agent  in  his  employ  after  knowledge  that  he  has  misap- 
propriated money  coming  into  his  hands  as  agent. 
Roberts  vs.  Donovan,  70  Calif.  108. 
Capital  Fire  Ins.  Co.  vs.  Watson,  76  Minn.  387. 

"Whenever  the  directors  of  a  bank  become  aware  of  the 
embezzlement  of  a  clerk  or  may  become  so  by  the  exercise 
of  slight  care  in  making  up  reports  and  statements  of  the 
bank's  condition,  they  owe  to  the  surety  on  his  bond  the 
duty  of  discharging  the  clerk  and  thus  terminating  the 
surety's  further  risk. 

Deposit  Bank  vs.  Hearne,  10-4  Ky.  819. 

Where  a  guaranty  company  bond  is  conditioned  that  if 
the  employer,  without  consent  of  the  company,  shall  intrust 
his  employee  with  money  after  having  discovered  any  act 
of  dishonesty,  the  bond  shall  be  null  and  void,  the  act  of  the 


LACHES  OE  INDULGENCE   BY  OBLIGEE.  101 

employer  in  retaining  his  employee  in  a  position  of  trust 
after  discovery  of  his  dishonesty  is  at  his  own  risk,  and  he 
cannot  hold  the  guaranty  company  liable  for  defalcations 
occurring  after  his  discovery  and  before  notice  to  the  guar- 
anty company. 

Remington  vs.  Fidelity  &  Deposit  Co.,  27  Wash.  429. 

75. — Same. 

Where  a  party  becomes  surety  upon  the  bond  of  a  treas- 
urer of  a  secret  society  for  the  faithful  application  of  mon- 
eys in  his  hands,  payable  to  the  society,  the  fact  that  the 
officers  and  members  of  the  society  knew  of  his  previous 
misappropriation  of  the  funds  entrusted  to  him  during  the 
prior  years,  and  with  such  knowledge  re-elected  him,  and 
failed  to  communicate  such  fact  to  his  sureties,  no  inquiry 
being  made  of  them  by  the  sureties,  and  they  doing  no  act 
to  put  the  sureties  off  their  guard  or  preventing  them  from 
ascertaining  the  facts,  no  fraud  can  be  imputed  to  the 
society  which  can  be  set  up  in  avoidance  of  the  sureties'  lia- 
bility on  the  bond. 

Roper  vs.  Trustees,  9  111.  518. 

Continuing  an  agent  who  is  under  bond  in  the  employ 
after  failure  to  account  only  discharges  the  surety  if  the 
delinquency  amounts  to  dishonesty,  or  is  such  as  before  the 
bond  Avas  given  would  have  been  a  fraud  not  to  disclose. 

Natl.  Life  Tns.  Co.  vs.  Ohlhaber,  17  B.  (Ohio)  353. 

When  a  bond  indemnifying  the  plaintiff  against  loss  by 
the  dishonesty  of  its  collectors  provides  that  the  plaintiff 
must  give  notice  of  any  act,  fact  or  information  tending  to 
indicate  that  an  employee  is  or  may  be  dishonest,  or  the 
obligation  is  void;  a  failure  of  the  plaintiff  to  notify  the 
surety  that  one  of  its  collectors  has  failed  to  turn  in  collec- 
tions at  the  time  required  by  its  rules,  and  neglected  to  re- 
spond to  the  plaintiff's  letters  and  personal  demands,  re- 


102  TIIK  LAW  OF  FIDELITY  BONDS. 

lievos  the  surety  from  all  liubilily  for  subsequent  collections 
made  by  said  collector,  but  not  turned  over  to  the  plaintiff. 
Supreme  Euling  vs.  Nat.  Sur.  Co.,  114  App.  Div. 
(N.  Y.)  689. 

Where  the  principal  commits  an  act  of  dishonesty  and  is 
unfaithful  to  his  trust,  the  employer  may  end  the  contract, 
and  the  surety  may  require  this  to  be  done. 
Emery  vs.  Baltz,  94  N.  Y.  408. 

See,  generally,  cases  following  Phillips  vs.  Foxall : 

Brillion  Lumber  Co.  vs.  Barnard,  131  Wis.  284. 
Harrison  vs.  Lumbermen's  Ins.  Co.,  8  Mo.  App. 

37. 
Newark  vs.  Stout,  52  N.  J.  L.  35. 


DistingTiished  from  the  above — 

W.,  C.  &  A.  K.  E.  Co.  vs.  Linff,  18  S.  C.  116. 


Mr.  Brandt,  in  his  work  on  Suretyship  and  Guaranty  (sec. 
478),  referring  to  the  question  as  to  whether  the  surety  of 
the  agent  of  a  private  corporation  is  discharged  by  the  cor- 
poration retaining  such  agent  after  knowledge  of  default, 
says : 

"The  better  opinion  would  seem  to  be  that  the  corpora- 
tion stands  on  the  same  footing  as  an  individual  employer, 
so  that  after  notice  to  its  supervising  agent  of  a  defalcation 
by  an  employee  under  his  supervision,  it  cannot  hold  the 
surety  on  his  fidelity  bond  if  it  retains  such  employee  with- 
out full  disclosure  to  and  consent  of  the  surety." 

See  also — 

Saint  vs.  Wheeler  &  Wilson  Mfg.  Co.,  95  Ala 
362. 


LACHES  OR  INDULGENCE   BY  OBLIGEE.  103 

For  further  consideration  of  the  last-mentioned  point,  see 
following  section: 

76. — Effect  of  Dealings  With  or  Indulgence  to  the  Principal  by 
the  Obligee  Without  the  Knowledge  and  Consent  of  the 
Surety — Digest  of  Authorities. 

The  rule  of  law  is  that  if  a  creditor,  without  the  knowl- 
edge and  consent  of  the  surety,  expressly  or  tacitly  yielded, 
gave  time  to  the  principal  by  enlarging  the  credit  beyond 
the  period  mentioned  in  the  contract,  the  surety  is  dis- 
charged, both  at  law  and  in  equity;  and  this  rule  is  appli- 
cable, as  well  to  bonds  with  collateral  conditions,  as  to 
bonds  for  the  payment  of  money,  and  whether  the  arrange- 
ment is  intended  for  the  benefit  of  the  surety  or  not. 
United  States  vs.  Hillegas,  3  Wash.  C.  C.  70. 

A  settlement  by  an  insurance  company  with  its  agent  for 
moneys  received  up  to  a  certain  time  by  taking  the  agent's 
note  payable  in  the  future  releases  the  surety  upon  the 
agent's  bond  for  the  period  covered  by  the  settlement,  the 
surety  not  being  a  party  to  the  settlement  nor  consenting  to 
the  extension  of  time. 

River  vs.  ISTew  Hampshire  Fire  Ins.  Co.,  9  Wyo.  81. 

Where  an  agent's  contract  provides  that  money  collected 
by  him  shall  be  turned  over  to  his  principal  at  the  end  of 
each  month,  the  failure  of  the  principal  to  require  monthly 
settlements,  knowing  that  its  funds  were  being  misappro- 
priated, will  discharge  the  sureties. 

Ind.  &  Ohio  Live  Stock  Ins.  Co.  vs.  Bender,  32  Ind. 
App.  287. 

A  surety  on  the  boud  of  an  agent  is  not  discharged  from 
liability  by  the  more  fact  that  the  principal  is  continued 
in  the  employment  of  the  obligee  after  he  has  failed  to  make 


04  iiii.;   I, AW    <)!•    lIDliMTV    Iioxns. 

piiyiiu'iits  i»r<)iii[)lly,  oi   whicli  fact   the  Hiircty  had  not  been 
advised. 

Home  Ins.  Co.  vs.  Holway,  55  Iowa,  571. 

Phopnix  Ins.  Co.  vs.  Findley,  59  Iowa,  591. 

The  obligee's  failure  to  notify  the  surety  on  the  bond  of 
an  agent  of  a  loan  association  of  the  agent's  delay  in  mak- 
ing remittances,  which  is  attributed  not  to  dishonesty,  but 
to  negligence  merely,  did  not  release  the  surety. 

Cumberland  Bldg.  Loan  Assn.  vs.  Gibbs,  119  ^lich. 
318. 

Failure  of  obligee  to  require  employee  to  render  weekly 
reports  as  required  by  contract  guaranteed  by  bond  will 
discharge  sureties  from  subsequent  defaults. 

Fidelity  Mutl.  Life  Ins.  Assn.  vs.  Dewey,  83  Minn. 
389. 

Where  a  condition  requiring  the  employer  to  notify  the 
surety  of  any  act  on  the  part  of  the  principal  which  may 
involve  a  loss  for  which  the  company  is  responsible  was 
contained  in  a  bond  of  indemnity  of  a  surety  company  given 
to  an  insurance  company  indemnifying  the  latter  against 
acts  of  fraud  or  dishonesty  upon  the  part  of  its  general 
agents  and  the  contract  between  the  general  agents 
and  the  insurance  company,  which  had  its  office  in  a 
distant  State,  required  the  agents  to  remit  the  money  col- 
lected fo."  any  one  month  within  fifty  days  from  the  end  of 
such  month,  but  the  agents  failed  to  remit  such  money  until 
from  sixty  to  one  hundred  days  after  the  end  of  such  month, 
partly  because  of  the  tardiness  of  their  sub-agents  to  collect 
and  remit  to  them,  and  partly  because  of  their  own  tardi- 
ness and  neglect,  but  Avithout  any  wrongful  or  fraudulent 
intent  on  their  part,  which  action  the  company  acquiesced 
in  as  a  substantial  compliance  with  their  contract,  the  fail- 
ure of  the  company  to  give  notice  to  the  surety  company  of 


LACHES  OK  IXDULGEI^CE   BY  OBLIGEE.  105 

such  delay  is  not  a  substantial  violation  of  the  condition  of 
the  bond. 

Pac.  Fire  Ins.  Co.  vs.  Pac.  Sur.  Co.,  93  Calif.  7. 

77. — Same. 

In  the  case  of  a  continuing  suretyship  (as  of  a  fire  insur- 
ance agent)  for  the  faithful  discharge  of  his  duties  by  his 
servant,  the  master  owes  the  sureties  no  absolute  and  active 
duty,  upon  the  discovery  of  mere  breaches  of  contract  obli- 
gations, to  discharge  the  servant  or  notify  the  sureties  of 
the  breach. 

Manchester  Fire  Ins.  Co.  vs.  Kedfield,  69  Minn,  10. 

If  the  creditor's  interference  authorizes  the  performance 
in  some  other  way  than  the  contract  provides,  the  sureties 
are  discharged  without  regard  to  whether  they  are  injured 
thereby  or  not. 

Burley  vs.  Hitt,  54  Mo.  App.  272. 

In  an  action  by  an  employer  upon  the  bond  of  an  em- 
ployee, the  surety  must  specially  plead,  in  order  to  avail 
himself  of,  the  defense  of  a  release  by  reason  of  the  em- 
ployer having  made  a  contract  with  the  employee  permit- 
ting the  latter  to  repay  the  money  misappropriated  by  work- 
ing a  sufficient  length  of  time  to  balance  the  same  with  his 
wages,  or  by  reason  of  the  imposition  upon  the  employee 
of  duties  not  contemplated  by  the  contract  and  materially 
increasing  the  risk  of  the  surety,  or  by  reason  of  the  em- 
ployer having  prejudicially  retained  the  employee  in  the 
service  after  discovering  his  delinquency,  concealing  the  sit- 
uation from  the  surety. 

Brillion  Lumber  Co.  vs.  Barnard,  131  Wis.  284. 

For  further  reference  to  the  subject  of  release  of  surety  by 
the  creditor  givinij  time  to  doctor,  see  the  leading  case  on  the 
subject — Bees  vs.  Berrington,  2  White  &  Tudor's  Gas.  Eq. 
1871 — ^with  review  of  authorities. 


!()(!  TJIE  LAW   OF  FIDELITY   BONDS. 

LACHES  OR  NEGLIGENCE  OF  THE  OBLIGEE  GENERALLY. 

78. — (a)    United  States  Government. 

Laches  is  not  imputable  to  the  Government,  as  affect  in j^ 
the  liability  of  sureties  on  official  bonds  of  Government  offi- 
cers.    The  rule  is  settled  beyond  question. 
2  Eose's  Notes,  323. 
40  Cent.  Dig.  206. 
Brandt,  Snr.  &  G.,  sec.  161. 


Illustrative  thereof  are  the  following  cases: 


79. — Digest  of  Authorities  Illustrative  of  Rule. 

United  States  vs.  Kirkpatrick,  9  Wheat.  720— Fail- 
ure to  account  periodically  by  a  Government  of- 
ficer does  not  operate  to  release  his  surety. 

United  States  vs.  Van  Zandt,  11  Wheat.  187— Fail- 
ure to  recall  a  paymaster  for  not  rendering  his 
vouchers  for  more  than  six  months,  as  required 
by  law. 

Bank  of  U.  S.  vs.  Dandridge,  12  Wheat.  81— Devia- 
tion from  directory  regulation  cannot  be  taken 
advantage  of  by  third  persons. 

United  States  vs.  Nicholl,  12  Wheat.  509— Statute 
requiring  treasury  officers  to  give  new  sureties 
while  allowed  to  remain  in  office. 

Dox  vs.  Postmaster-General.  1  Pet.  325 — Failure  of 
Postmaster-General  to  prosecute  a  defaulting 
postmaster  within  time  prescribed. 


LACHES  OE  INDULGENCE  BY  OBLIGEE.  107 

LTnited  States  vs.  Boyd,  15  Pet.  208 — Failure  of  a 
receiver  of  public  moneys  to  make  the  quarterly 
payments  required  by  the  rules. 

United  States  vs.  Thompson,  98  U.  S.  489— Holding 
the  United  States  is  not  bound  by  the  statute 
of  limitations  of  any  State. 

United  States  vs.  Cutter,  2  Curt.  625 — Misappro- 
priation by  navy  agent  of  public  moneys  paid 
to  him  contrary  to  law. 

Postmaster-General  vs.  Munger,  2  Paine,  197 — - 
Omission  of  Postmaster-General  to  discharge  a 
postmaster  in  arrears. 

Locke  vs.  Postmaster-General,  3  Mason,  455 — Neg- 
lect of  Postmaster-General  to  sue  for  balance 
due  by  postmasters. 

Postmaster-General  vs.  Reeder,  4  Wash.  C.  670 — To 
same  effect. 

Raymond  vs.  United  States,  14  Blatchf.  52 — Neglect 
of  Secretary  of  ISTavy  to  arrest  and  prosecute  a 
paymaster  who  was  sqandering  the  money  in 
his  hands. 

United  States  vs.  Potter,  27  Fed.  Cas.  604— Holding 
statute  authorizing  salary  of  an  officer  in  ar- 
rears to  be  withheld  forms  no  part  of  contract 
with  sureties. 

United  States  vs.  Wright,  28  Fed.  Cas.  794— Ex- 
tending time  to  a  postmaster  to  settle  his  ac- 
counts. 


108  'iiir:  I, AW  oi'  i'idki.ii v  bonds. 

Williams  vs.  Lyman,  8.S  I^'cd.  24\  —  Holding  intfrnal 
revenue  collector's  negligence  in  not  examining 
his  deputy's  accounts  would  not  release  the  dep- 
uty's sureties. 

United  States  vs.  Saylor,  31  Fed.  549 — Holding  that 
sureties  on  a  postmaster's  bond  were  liable  for  a 
rebate  secretly  received  by  him  from  landlord 
of  the  office,  and  for  rent  of  newsstand. 

Utiited  States  vs.  Adams,  54  Fed.  116 — Failure  of 
Government  to  present  claim  against  deceased 


8o. — Same. 


marshal 


Meads  vs.  United  States,  81  Fed.  688 — Regulations 
of  the  Land  Office  cannot  enlarge  or  restrict  the 
liability  of  an  officer  on  his  bond. 

Pickering  vs.  Day,  3  Houst.  536 — Holding  that  a 
collector  of  internal  revenue  was  not  bound  to 
discharge  a  deputy  collector  on  discovery  of  his 
defalcation,  and  that  his  failure  to  do  so  did  not 
relieve  the  sureties  on  the  deputy's  bond. 

Jones  vs.  LTnited  States,  18  Wall.  662 — On  a  suit  by 
the  Government  against  the  sureties  of  a  post- 
master on  his  official  bond,  it  is  no  defense  that 
the-  Government  "through  their  agent,  the  Audi- 
tor of  the  Treasury  of  the  Post  Office  Depart- 
ment, had  full  notice  of  the  defalcation  and  em- 
bezzlement of  funds  of  the  plaintiff  before  them, 
and  yet  neglectfully  permitted  the  said  postmas- 
ter to  remain  in  office,  whereby  he  was  enabled 
to  commit  all  the  default  and  embezzlement." 


LACHES  OR  INDULGENCE  BY  OBLIGEE.  109 

Smith  vs.  United  States,  30  U.  S.  292— Failure  of 
United  States  to  require  account  by  public  offi- 
cer for  eleven  years  after  his  removal  from  office 
and  his  having  become  insolvent  in  the  mean- 
time no  release  to  sureties. 

Postmaster-General  vs.  Ustick,  4  Wash,  C.  C.  347 — 
Fraudulent  omission  of  Postmaster-General  to 
require  settlement  by  deputy  postmaster. 

United  States  vs.  Witten,  143  U.  S.  76— Failure  of 
Government  officers  to  provide  proper  locks  for 
distillery  warehouse,  permitting  spirits  to  be 
stolen,  no  defense  to  action  on  the  distiller's 
bond. 

It  was  held,  however,  in  United  States  vs.  Beebe,  17 
Fed.  38,  that,  in  equity,  lapse  of  time  may  bar  a 
suit  by  the  Government  under  certain  circum- 
stances. 

8x. — (b)  State,  Municipal  and  Other  Public  Corporations. 

The  rule  that  the  laches  or  indulgence  of  one  public  offi- 
cer will  not  operate  to  release  the  sureties  on  the  official  bond 
of  another  officer,  as  applicable  to  State,  municipal  and  other 
public  corporations,  is,  in  conformity  with  the  principle  laid 
down  bj  the  Federal  Courts  relative  to  Government  officers, 
supported  by  the  great  weight  of  authority. 

82. — Digest  of  Authorities. 

State  vs.  Brewer,  64  Ala.  298 — Estoppels  against  a 
State  cannot  arise  from  laches  of  its  officers. 

Ex  parte  Christian,  23  Ark.  642 — Failure  to  require 
settlement  from  a  collector  prior  to  his  becom- 
ing insolvent. 


1]0  TJIK   J.AW    OF   IlJ>j;j.lTY    li(JND.S. 

Stern  vs.  People,  102  111.  550 — Holding  failure  of  a 
county  board  to  remove  the  county  treasurer  for 
refusing  to  make  a  report  of  his  receipts  did 
not  release  his  sureties. 

Kindle  vs.  State,  7  Blackf.  589 — Holding  county 
treasurer's  sureties  not  discharged  by  a  change 
of  law  extending  time  of  county  treasurer  for 
making  settlements  and  payments. 

Boone  Co.  vs.  Jones,  54  Iowa,  703 — Absence  of  rec- 
ord of  approval  of  bond,  as  required  by  statute, 
did  not  affect  its  validity. 

Commonwealth  vs.  Preston,  5  T.  B.  Mon.  589 — Neg- 
lect of  County  Court  to  compel  guardian  to  ren- 
der inventory  and  make  settlement. 

Bonta  vs.  Mercer  Co.  Court,  7  Bush.  579 — Failure 
of  Co.  Court  to  appoint  a  commissioner  to  set- 
tle sheriff's  accounts. 

State  vs.  Duim,  11  La.  Ann.  551 — Failure  of  auditor 
to  require  proceedings  to  be  instituted  for  a 
former  default. 

Inhabitants"  of  Farmington  vs.  Stanley,  60  Me. 
476 — Failure  of  selectmen  to  examine  accounts 
of  town  treasurer. 

Milburn  vs.  State,  1  Md.  19 — In  dissenting  opinion, 
majority  holding  that  if  sureties  to  bond  of  col- 
lector of  taxes  which  required  approval  could 
show  it  had  not  been  approved,  they  are  not 
bound. 

Detroit  vs.  Weber,  26  Mich.  290 — Failure  to  observe 
the    provisions    of    an    ordinance    requiring    a 


LACHES  OE  INDULGENCE  BY  OBLIGEE.  Ill 

monthly  examination  of  accounts  of  city  treas- 


urer. 


Board  of  Commissioners  vs.  Security  Bank,  77  IN". 
W  817 — Holding  sureties  on  a  bank's  bond  to 
county  not  released  by  failure  of  county  to  file 
its  claim  against  a  bank  after  it  became  insol- 
vent. 

Parks  vs.  State,  7  Mo.  196— Delay  in  bringing  suit 
on  collector's  bond  for  several  years  after  de- 
fault. 

Morris  Canal  vs.  Van  Vorst,  21  N.  J.  L.  117— Hold- 
ing that  statutory  directions  that  agents  shall 
account  are  for  the  security  of  the  government, 
but  constitute  no  part  of  the  contract  with  the 
surety. 

Newark  vs.  Stout,  52  N.  J.  L.  49— Holding  that 
statutes,  by-laws  and  ordinances  making  it  the 
duty  of  certain  officers  to  supervise  accounts 
were  not  for  the  benefit  of  sureties  to  an  offi- 
cial's bond,  and  will  not  avail  as  a  defense 
thereon,  collecting  authorities. 


83. — Same. 


People  vs.  Eussell,  4  Wend.  575 — Holding  omission 
of  comptroller  for  eight  years  to  prosecute  the 
bond  of  a  commissioner  of  loans,  no  defense  to 
surety. 

Looney  vs.  Hughes,  26  IST.  Y.  519 — Holding  a  stat- 
ute requiring  a  county  treasurer  to  issue  a  war- 
rant against  a  delinquent  town  collector  merely 
directory,  and  delay  did  not  release  the  sureties. 


112  TJIE  LAW   OF  FIDELITY   BOKDS. 

Commonwealtli  vs.  Brice^  22  Pa.  St.  214 — The  rule 
of  laches  applies  to  county  as  well  as  State 
officers. 

Commissioners  vs.  Phila.  Co.,  157  Pa.  St.  547 — Af- 
firming rule,  but  Commonwealth  not  entitled  to 
gain  and  charge  interest  for  the  delay  of  its 
officers. 

Loving  vs.  Auditor,  76  Ya.  950 — Holding  that  a  fail- 
ure to  certify  and  countersign  drafts  drawn  by 
the  general  agent  of  the  penitentiary  did  not 
affect  the  liability  of  sureties  of  the  agent's 
bond. 

Crawn  vs.  Commonwealth,  84  Va.  286 — Holding 
failure  to  require  prompt  settlement  of  county 
treasurer's  balances  did  not  affect  his  sureties. 

Mayor  vs.  Blache,  6  La.  517 — Holding  that  sureties 
of  a  new  bond  could  not  plead  laches  in  not  call- 
ing city  treasurer  to  account  for  defalcations  of 
past  year. 

Rochereau  vs.  Jones,  29  La.  Ann.  82 — Illegal  cancel- 
lation of  an  official  bond  will  not  release  the 
sureties  on  the  bond. 

Campbell  vs.  People,  154  111.  595 — Xeglect  of  county 
treasurer  no  defense  to  sureties  on  bond  of 
county  clerk. 

Monroe  Co.  Supv's.  vs.  Otis,  62  X.  Y.  88— Mere 
non-performance  of  some  affirmative  act,  which 
if  performed  might  prevent  loss,  is  not  avail- 
able as  defense  by  sureties.  Failure  to  examine 
account  no  defense. 


LACHES  OE  INDULGENCE  BY  OBLIGEE.  113 

City  vs  Eedmond,  28  La.  Ann.  274 — Sureties  of  tax 
collector  not  released  by  laches  of  Mayor  and 
council  to  require  monthly  reports,  as  required 
by  ordinance. 

Stern  vs.  People,  102  111.  540 — Failure  of  county 
board  to  remove  county  treasurer  no  defense  to 
treasurer's  sureties. 

Board,  &c.,  vs.  Sheehan,  42  Minn.  57 — Neither  neg- 
ligence of  county  commissioners  in  their  super- 
visory duties  over  treasurer,  nor  their  actual 
malfeasance,  facilitating  or  encouraging  a  con- 
version of  public  funds,  is  a  defense. 

Aetna  Ind.  Co.  vs.  City  of  Haverhill,  142  Fed.  124— 
Kesolution  by  city  council  providing  for  salary 
of  treasurer  and  payment  of  premium  for  his 
corporate  surety  bond,  and  false  statements 
made  by  him,  no  defense. 

State  vs.  Powell,  40  La.  Ann.  234 — Laches  or.  omis- 
sions of  other  officers  of  State  cannot  avail  as 
defense. 

Harrisburg  vs.  Guiles,  192  Pa.  St.  191— Mere  negli- 
gence by  city  in  failing  to  notify  sureties  of  col- 
lector of  delinquent  taxes  of  his  negligence  no 
defense  in  absence  of  showing  of  actual  embez- 
zlement by  collector  or  fraud  by  city  officials. 

84. — Same. 

State  vs.  Lake,  45  La.  Ann.  1207 — Giving  of  time  by 
auditor  to  commissioner,  no  defense. 

Inhabitants  vs.  Miles,  185  Mass.  582 — ISTegligence  of 
town  officers  in  failing  to  discover  misconduct 
of  collector. 


114  TIIK    I, AW    Ol'    KrhKI.nY    HONDS. 

Bush  v.^.  Jolinsoii,  48  Neb.  1 — Xoglif^oiK-o  of  county 
board  in  t-xamining  accounts  of  treasurer. 

Commonwealth  vs.  Tate,  89  Ky.  587 — Failure  of 
auditor  and  Secretary  of  State  to  perform  du- 
ties imposed  by  law  requiring  examination  of 
accounts  of  treasurer. 

Cawley  vs.  People,  95  111.  249 — No  obligation  on 
county  board,  whose  duty  it  was  to  approve 
bond  of  county  treasurer,  to  communicate  to  his 
sureties  the  fact  that  he  was  in  default  in  a 
previous  term. 

State  vs.  Smith,  16  Fla.  175 — Demand  by  sureties 
for  collector  of  State  revenue  on  Governor  for 
removal  of  their  principal  for  neglect  of  duty, 
and  refusal  of  Governor,  no  defense  for  subse- 
quent default. 

Fidelity  &  Deposit  Co.  vs.  Commonwealth,  104  Ky. 
579 — Rule  that  sureties  will  be  released  by  con- 
cealment of  previous  default  inapplicable  to 
bonds  of  public  officials.  To  the  same  effect  is 
Wade  vs.  City  of  Mt.  Sterling,  33  S.  W.  113. 

Ind.  School  Dist.  vs.  Am.  Sur.  Co.,  110  Iowa,  58— 
Board  of  school  directors  not  bound  to  warn  a 
surety  of  dishonesty  of  re-elected  treasurer,  al- 
though known  to  them  before  the  bond  was 
written,  nor  can  such  surety  avoid  liability  be- 
cause of  false  statements  as  to  the  treasurer's 
accounts  made  to  it  by  the  president  of  the 
school  board  before  the  bond  was  executed,  with- 
out authority  and  having  no  connection  with 
his  official  dutv. 


LACHES  OR  INDULGENCE   BY  OBLIGEE.  115 

Commonwealth  vs.  Jimison,  205  Pa.  St.  367 — Surety 
for  collector  of  delinquent  taxes  not  discharged 
because  county  treasurer  knew  when  he  ap- 
pointed the  collector  that  the  latter  was  a  de 
faulter  for  previous  years,  and  did  not  reveal 
this  fact  to  the  sureties  when  the  bond  was 
taken. 

For  further  reference  to  the  subject  of  representations  by 
public  officials  to  sureties,  see  Chapter  3. 

For  general  review  of  authorities  on  the  subject  of  laches 
of  public  officers  as  affecting  the  liability  of  sureties,  see — 
2  Rose's  notes,  323. 
Brandt,  Sur.  &  Guar.,  sec.  161,  n.  61. 

85. — Same— Against  the   Rule. 

For  authorities  against  the  nile,  see  the  following : 

Boone  Co.  vs.  Burlington,  139  TJ.  S.  693— Rule  not 
applicable  to  a  county,  collecting  authorities. 

Gvadle  vs.  Hoffman,  105  111.  147— Failure  of  sheriff 
to  remove  deputy  on  discovery  of  defalcation 
will  release   sureties. 

People  vs.  Jansen,  7  Johns.  332 — Laches  of  super- 
visors in  permitting  occupant  to  remain  in  pub- 
lic office  for  ten  years  after  known  default  will 
discharge  sureties. 


86. — (c)    Private  Corporations. 

There  is  considerable  conflict  in  the  authorities  as  to  the 
applicability  of  the  doctrine  that  the  laches  or  indulgence  of 
one  officer  of  a  corporation  will  not  operate  to  discharge  the 


11  G  TlIK  I- AW  OF  FIDELITY  BONDS. 

sureties  of  another  officer,  to  private  corjKirations  (as  dis- 
tinguished from  municipal  or  other  public  governmental  cor- 
porations). 

87. — Leading  Case. 

The  leading  case  in  support  of  the  affirmative  of  the  prop- 
osition is  Pittsburgh,  F.  W.  &  C.  Ry.  Co.  vs.  Shaeffer,  59 
Pa.  St.  350. 

This  was  an  important  suit  for  a  large  amount,  the  opin- 
ion being  delivered  by  Justice  Sharswood.  It  was  contended 
on  behalf  of  the  sureties  that  the  forebearance  or  neglect  of 
the  railway  company  or  certain  of  its  officers  to  require 
monthly  accounting  by  their  principal,  as  required  by  the 
mles  of  the  road,  whereby  he  was  enabled  to  continue  and 
increase  his  peculations,  and  the  like  failure  to  notify  the 
sureties  until  three  months  after  their  principal  had  been  re- 
moved from  office  and  had  become  an  absconder  and  left  the 
coimty  would  release  them  from  all  liability.  It  was  further 
contended  that  there  is  a  distinction  between  government  offi- 
cers in  this  respect  and  the  officers  of  a  private  corporation. 

Justice  Sharswood,  delivering  the  opinion  of  the  Court 
said : 

''The  rule  is  well  settled  that  mere  forbearance  by  the 
creditor  to  the  principal  debtor,  however  prejudicial  it  may 
be  to  the  surety,  will  not  have  the  effect  of  discharging  him 
from  his  liability.  That  this  is  the  general  principle  was 
admitted  by  the  learned  judge  in  the  Court  below,  but  he 
thought  that  the  sureties  of  a  railroad  officer,  charged  with 
the  receipt  and  disbursement  of  various  sums  of  money, 
formed  an  exception,  and  that  in  such  a  case  it  was  the 
duty  of  the  company  to  dismiss  the  officer  as  soon  as  any 
default  became  knoA\Ti,  and  to  give  notice  to  his  sureties  in 
order  that  they  might  take  measures  to  secure  themselves 
by  proceedings  against  the  principal. 


LACHES    OE    I^yTDULGENCE    BY    OBLIGEE.  117 

"But  no  authorities  are  to  be  found  in  the  books  sustain- 
ing any  such  distinction.  On  the  contrary,  in  regard  to 
the  sureties  of  the  officers  of  government,  whose  duties  in 
receiving  and  disbursing  money  are  of  the  same  varied 
character,  it  has  been  invariably  held  that  they  are  not 
discharged  by  such  indulgence.  The  United  States  vs.  Kirk- 
patrick,  9  Wheat.  720,  was  the  case  of  a  collector  of  direct 
taxes  and  internal  duties.  'It  is  admitted,'  said  Story,  J., 
'that  mere  laches,  unaccompanied  with  fraud,  forms  no  dis- 
charge of  a  contract  of  this  nature  between  private  individ- 
uals. Such  is  the  clear  result  of  the  authorities.  Why, 
then,  should  a  more  rigid  principle  be  applied  to  the  gov- 
ernment— a  principle  which  is  at  war  with  the  general  in- 
dulgence allowed  to  its  rights,  which  are  ordinarily  pro- 
tected from  the  bars  arising  from  length  of  time  and  negli- 
gence? It  is  said  that  the  laws  require  that  settlement 
should  be  made  at  short  and  stated  periods;  and  that  the 
sureties  have  a  right  to  look  to  this  as  their  security.  But 
these  provisions  of  the  law  are  created  by  the  government 
for  its  own  security  and  protection,  and  to  regulate  the  con- 
duct of  its  own  officers.  They  are  merely  directory  to 
such  officers,  and  constitute  no  part  of  the  con- 
tract with  the  surety.  The  surety  may  place  confidence  in 
the  agents  of  the  government,  and  rely  on  their  fidelity  in 
office;  but  he  has  the  same  means  of  judgment  as  the  gov- 
ernment itself,  and  the  latter  does  not  undertake  to  guar- 
anty such  fidelity.' 

"The  reasons  so  clearly  stated  by  Story,  J.,  in  regard  to 
officers  of  government  apply  with  equal  force  to  the  officers 
of  corporations.  Corporations  can  act  only  by  officers  and 
agents.  They  do  not  guaranty  to  the  sureties  of  one  officer 
the  fidelity  of  the  others.  The  rules  and  regulations  which 
they  may  establish  in  regard  to  periodical  returns  and  pay- 
ments are  for  their  own  security,  and  not  for  the  benefit 
of  the  sureties.  The  sureties,  by  executing  the  bond,  be- 
came responsible  for  the  fidelity  of  their  principal.  It  is 
no  collateral  engagement  into  which  they  enter,  dependent 


118  TJIK  LAW   OF  FIDELITY   BONDS. 

on  some  contingency  or  condition  different  from  tli(,'  en- 
gagement of  their  principal.  They  become  joint  obligors 
with  him  in  the  same  bond,  and  with  the  same  condition 
underwritten.  The  fact  that  there  were  other  unfaithful 
officers  and  agents  of  the  corporation,  who  knew  and  con- 
nived at  his  infidelity,  ought  not  in  reason,  and  does  not  in 
law  or  equity,  relieve  them  from  their  responsibility  for 
him.  They  undertake  that  he  shall  be  honest,  though  all 
around  him  are  rogues.  Were  the  rule  different,  by  a  con- 
spiracy between  the  officers  of  a  bank  or  other  moneyed 
institution,  all  their  sureties  might  be  discharged.  It  is 
impossible  that  a  doctrine  leading  to  such  consequences  can 
be  sound." 

88. — Same — Discussion. 

The  aforegoing  language  has  been  much  quoted,  and  the 
precedent  a.s  here  laid  do\\Ti  followed  in  many  eases.  The 
same  Court,  however,  in  the  late  case  of  Commonwealth  vs. 
Jimison,  205  Pa.  St.  367,  held :  ''There  is  a  clear  distinction 
between  the  liabilities  of  sureties  on  an  obligation  to  an 
individual  or  private  corporation,  and  to  a  public  municipal 
coqioration."  Xo  reference  was  made  to  the  Shaeffer  Case 
in  either  the  briefs  of  counsel  or  the  opinion  of  the  Court.  It 
would  seem,  however,  that  the  later  decision  in  effect  over- 
ruled the  foinier. 

Notwithstanding  the  eminent  authority  in  support  of  the 
proposition  that  the  general  rule  of  laches  as  applied  to  Gov- 
ernment officers  is  applicable  to  private  corporations,  it  is 
suggested  that  the  absence  of  the  theory  of  sovereignty  and 
the  protection  of  the  public  embraced  in  the  reason  of  the 
rule,  and  in  view  of  the  fact  that  a  private  coi*poration  can 
only  act  by  its  officers  and  agents,  it  would  be  more  in  con- 
sonance with  the  principles  of  law  and  justice  to  hold  that 
the  acts  or  negligence  of  the  representatives  of  such  a  cor- 
poration are  the  acts  or  negligence  of  the  corporation  and 


LACHES    OK    INDULGENCE    BY    OBLIGEE.  119 

binding  upon  it.  And  tkis  appears  to  be  the  view  of  the  later 
authorities.  Indeed,  in  numerous  cases  defended  on  the 
ground  of  acts  or  omissions  of  an  officer  or  agent  of  a  private 
corporation,  the  rule  here  referred  to  has  not  been  invoked 
at  all. 

89. — Leading  Case  Supported  by  Following  Authorities. 

The  rule  as  adopted  by  the  Shaeffer  Case  is  supported  by 
the  following  cases : 

Sparks  vs.  Farmers'  Bank,  3  Del.  Ch.  303— Holding 
surety  on  bank  cashier's  bond  continues  as  long 
as  he  holds  office  by  virtue  of  his  appointment, 
notwithstanding   his    annual   election. 

Mutual  L.  &  B.  Assn.  vs.  Price,  16  Fla.  212— Fail- 
ure of  officers  of  a  corporation  to  have  period- 
ical examinations  of  the  treasurer's  accounts. 

Mutual  Loan,  &c.,  Assn.  vs.  Miles,  16  Fla.  204 — To 
the  same  effect. 

Albany  Dutch  Church  vs.  Vedder,  14  Wend.  171 — 
Failure  to  observe  a  by-law  requiring  treasurer 
of  a  corporation  to  account  every  six  months. 

Kichmond,  etc.,  K.  R.  vs.  Kasey,  30  Graft.  229 — 
Holding  sureties  to  bond  of  a  general  frieght 
and  ticket  agent  bound,  notwithstanding  he 
failed  to  settle  his  accounts  promptly,  and  gave 
credit  contrary  to  orders. 

Frelinghuysen  vs.  Baldwin,  16  Fed.  452 — ISTeglect 
of  officers  to  discover  fraud  of  cashier. 


lliO  'JUK  I,AW    OF   FIDKLITY   BONDS. 

I'iiillips  VS.  Bossard,  35  Fed.  99 — jNTegligence  and 
misconduct  of  presidcjit  and  directors  will  not 
release  sureties  of  easliicr. 

Frink  vs.  Soutlu  in  Exp.  Co.,  82  Ga.  33— Failure  of 
express  coin[)aiiy  to  provide  Avatchman  of  safe 
duiiiig  absence  of  messenger  no  defense  to  sure- 
ties of  messenger. 

Market  St.  Bank  vs.  Stumpe,  2  Mo.  App.  545 — 
Knowledge  and  sanction  by  directors  of  over- 
di-aft  by  teller  will  not  release  sureties  of  latter. 

BostAvick  vs.  Van  Yoorhis,  91  N".  Y.  353 — Mere  ir- 
regularities of  cashier,  even  if  known  to  direct- 
ors, furnish  no  defense  to  sureties  of  former. 

Union  Bank  vs.  Forrest,  3  Cranch  C.  C.  218 — Xeg- 
lect  of  cashier  to  settle  daily  accounts  with  teller 
will  not  release  latter's  sureties. 

Donnell  Mnfg.  Co.  vs.  Jones,  49  111.  App.  327— Re- 
tention of  employee  by  employer  after  failure  to 
pay  over  funds  no  defense  to  surety. 

90. — Same. 

LaRose  vs.  Logansport  ISTat.  Bank,  102  Ind.  332— 
Notice  to  bank  that  cashier  is  addicted  to 
drunkenness  and  other  vices  will  not  release 
sureties. 

Home  Ins.  Co.  vs.  Holway,  55  loAva,  571 — Agent's 
bond  not  discharged  by  mere  fact  he  has  failed 
to  make  prompt  payments. 

Tpylor  vs.  Bank  of  Kentucky,  25  Ky.  564 — Plea 
that  cashier's  defaults  were  known  and  connived 


LACHES    OK    INDULGEJv'CE    BY    OBLIGEE.  121 

at  by  officers  of  bank  no  defense  to  surety  un- 
les3  fraud  is  charged  upon  obligees  and  sureties 
prejudiced  thereby.  But  if  law  requires  re- 
moval of  cashier  for  delinquency,  his  sureties 
not  liable  for  subsequent  defaults,  if  not  re- 
moved. 

Socialistic  Co.  of  Pub.  Assn.  vs.  Hoffmann,  33  IST. 
Y.  Supp.  695 — Retention  of  agent  after  knowl- 
edge of  default  in  April  until  September  no 
release  to  sureties  for  misappropriations  prior 
to  April. 

Wilmington,  &c.,  Co.  vs.  Ling,  18  S.  C.  116— Fraud- 
ulent continuation  of  employee  in  service  by  em- 
ployer after  knowledge  of  default  no  release  to 
sureties. 

People's  Bldg.  Assn.  vs.  Wroth,  43  N".  J.  L.  70— Un- 
authorized acts  or  laches  of  one  agent  of  a  cor- 
poration cannot  annul  its  rules  relating  to  the 
duties  of  another  agent. 

Batchelor  vs.  Planters'  Nat.  Bank,  78  Ky.  435— 
Want  of  diligence  by  directors  no  defense  to 
sureties  of  cashier.  Also  Fidelity  &  Deposit 
Co.  vs.  Courtney,  186  U.  S.  342. 

Bonne  vs.  Mt.  Holly  Bank,  45  N".  J.  L.  360— Mere 
fact  that  cashier  was  a  defaulter  when  bond 
was  given  no  defense  to  his  sureties,  nor  is  neg- 
lect of  bank  to  ascertain  that  fact. 

Bond  vs.  Central  Bank,  2  Ga.  108 — Holding  certain 
provisions  in  the  bank  charter  fixing  a  limit  to 
the  loans  to  any  one  person  only  directory. 


122  Till';    J.AW    Ul-'    I'lDKJ.IlV    J!<)M>S. 

La  State  IJaiik  vs.  Lcdoux,  3  J.a.  Ann.  6.S5 — Refusal 
of  bank  to  prosecute  an  official  and  defining 
sureties'  duty  in  such  cases. 

McShane  vs.  Howard  Bank,  73  Md.  156 — Failure  of 
bank  to  notify  sureties  of  defalcation  no  re- 
lease. 

Amherst  Bank  a's.  Root,  2  Met.  .541 — Laches  of  di- 
rectors in  examining  into  the  affairs  of  the 
barJc  as  required  by  the  by-laws  does  not  release 
sureties  of  a  bank  officer.  Also  Atlas  Bank  vs. 
Brownell,  9  R.  I.  168^  and  Lieberman  vs.  First 
ITational  Bank,  40  AtL  384. 

Tapley  vs.  Martin,  116  Mass.  278 — Commission  of 
previous  frauds  by  cashier  on  the  bank,  if  un- 
known to  the  officers  of  the  bank. 

State  vs.  Atherton,  40  Mo.  217 — Negligence  of  di- 
rectors and  cashier  in  counting  the  cash. 

Chew  vs.  Ellingwood,  86  Mo.  273 — Holding  sure- 
ties of  bank  bookkeeper  responsible  for  his  de- 
falcations, though  made  with  consent  of  the 
cashier  and  negligence  of  directors. 


1. — The  Court  quotes  with  ap- 
proval McTagfiart  vs.  Walson.  8 
CI.  &  F.  536 :  "Lord  Brougham,  in 
delivering  judgment,  said  the  de- 
faulter had  given  bond  to  ac- 
count, and  that  It  was  no  excuse 
that  the  other  party  did  not  see 


thing,  is  not  released,  unless  the 
obligor  has  prevented  the  thing 
being  done,  or  connived  at  its 
omission,  or  enabled  him  to  do 
something  he  ought  not  to  do,  or 
to  leave  undone  that  which  he 
should  have  done,  and  it  appears 


that  he  did  it ;  that  a  party  en-  j   that  but  for  such  conduct  the  de- 
gaging   that   another   shall   do   a  ,    fault  would  not  have  happened.'' 


LACHES    OR    INDULGENCE    BY    OBLIGEE.  123 

91. — Authorities  Against  Rule  as  Adopted  in  Shaeffer  Case. 

The  negative  of  the  proposition  finds  support  in  the  numer- 
ous cases  between  sureties  and  coi'iiorations  in  which  the  pro- 
tection of  the  rule  has  not  been  invoked,  as  well  as  in  the  fol- 
lowing: 

Brandt    Sur.  &;  Guar.,  sec.  478. 

Clements  vs.  Anderson,  46  Miss.  598 — Holding  that 
rule  as  to  laches  is  confined  to  the  Government 
and  State. 

Morrison  vs.  Arons,  65  Minn.  321 — Failure  of  em- 
ployer of  general  manager  to  require  monthly 
accounting  according  to  terms  of  employment 
released  manager's  sureties. 

Roberts  vs.  Donovan,  70  Cal.  108 — Agent's  sureties 
are  discharged  if  person  to  whom  bond  given 
retains  agent  after  knowledge  of  his  misappro- 
priation of  funds. 

Charlotte,  &c.,  vs.  Gow,  59  Ga.  685 — If  agent  of 
corporation  is  intrusted  with  funds  after  failure 
to  pay  over,  his  sureties  Avill  be  discharged. 

Rapp  vs.  Phoenix  Ins.  Co.,  113  111.  390— Surety  on 
official  bond  released  by  retention  of  principal 
after  default  of  which  obligee  has  knowledge. 

Aetna  Ins.  Co.  vs.  Fowler,  108  Mich.  557 — Continu- 
ing agent  in  service  of  corporation  after  knowl- 
edge of  default  will  discharge  his  sureties  for 
subsequent  misconduct. 


124  TIIK    r.AW    OK    FIDKLri'V    BONDS. 


CHAPTER  V. 

FRAUD    OR   DISHONESTY- LARCENY    OR    EMBEZZLEMENT. 
92.     Meauiug  of  terms.  i    98.     Crimes  by  National  Bank  of- 


93. 

Illustration. 

cers. 

94. 

Strict  proof   as   in   criminal 

99. 

Terms  construed  substantial 

case  not  necessary  in  civil 

ly  as   wrongful   misappli 

action. 

cation  of  funds. 

95. 

Digest  of  autliorities. 

96. 

Same. 

97. 

Same. 

92. — Meaning  of  Terms. 

The  earlier  forms  of  corporate  fidelity  bonds  provided  for 
indemnification  asainst  loss  by  "fraud  or  dishonesty"  of  the 
employee.  In  more  recent  years,  indemnification  is  provided 
against  the  *  fraud  or  dishonesty  of  the  employee  amounting 
to  larceny  or  embezzlement,"  or  some  similar  provision.  Some 
difficulty  has  been  experienced  in  arriving  at  the  true  mean- 
ing of  these  provisions. 

93. — Illustrations. 

Thus  a  bond  prepared  by  a  surety  company  guaranteeing 
an  employer  against  "loss  by  reason  of  the  dishonesty  or 
fraud  amounting  to  larceny  or  embezzlement,"  of  an  em- 
ployee, has  been  held  by  the  Supreme  Court  of  Illinois  (City 
Tnist,  (Src,  Co.  vs.  Lee,  204  111.  69)  to  be  a  guaranty  against 
dishonesty  or  fraud  of  the  employee,  whether  such  as  would 
render  him  liable  to  indictment  for  larceny  or  embezzlement, 
07*  not.  The  Illinois  Appellate  Court,  in  a  later  ease,  and 
followinfi:  the  decision  in  the  Lee  Case,  held : 


FEAUD^    DISHONESTY^    EMBEZZLEMENT^    ETC.  125 

That  in  a  corporate  fidelity  bond  requiring  the  company 
to  reimburse  the  employer  for  such  pecuniary  loss  sustained 
''by  any  act  of  fraud  or  dishonesty  amounting  to  larceny 
or  embezzlement."  The  words  "fraud  or  dishonesty"  and 
the  words  "amounting  to  larceny  or  embezzlement"  are  both 
phrases  qualifying  the  word  "act." 

Am.  Bonding  Co.  vs.  New  Amsterdam  Cas.  Co.,  125 
111.  App.  33. 

One  of  the  cardinal  canons  for  the  construction  of  all  writ- 
ten instruments  is  that  the  Court  shall,  if  possible,  give  effect 
to  every  part  thereof.  The  Supreme  Court  of  Illinois  in  the 
foregoing  decision,  has  entirely  disregarded  the  qualifying 
phrase,  "amounting  to  larceny  or  embezzlement,"  and  con- 
strued the  bond  as  though  it  had  provided  indemnification 
against  the  "acts  of  the  employee  amounting  to  fraud  or  dis- 
honesty." With  reference  to  this  decision,  it  is  perhaps  suffi- 
cient to  say  that  in  all  the  cases  before  and  since  dealing  with 
like  or  similar  provisions  in  corporate  fidelity  bonds,  no  such 
construction  has  ever  been  made  or  even  suggested. 

Supreme  Council  Catholic  Knights  of  America 

vs.  Fidelity  &  Cas.  Co.,  63  Fed.  48. 
Perpetual  B.  &  L.  Assn.  vs.  U.  S.  Fidelity  & 

Guaranty  Company,  118  Iowa,  729. 
Monongahela  Coal   Co.   vs.   Fidelity  &   Deposit 
Co.,  94  Fed.  732. 

It  was  held,  however,  in  Champion  vs.  Amer,  B.  &  T.  Co., 
115  Ky.  86o,  that  the  terms  "larceny"  and  "embezzlement" 
in  such  a  bond  are  used  as  generic  terms  to  indicate  the  dis- 
honest and  fraudulent  breach  of  any  duty  or  obligation  upon 
the  part  of  an  employee  to  pay  over  to  his  employer,  or  ac- 
count to  him  for  any  money,  securities  or  other  personal 
property,  the  title  to  which  is  in  the  employer,  that  may  in 
any  manner  come  into  the  possession  of  the  employee;  and, 


ll*<;  TIIK    LAW    ()|-    I  II)i;i,irv    BONDS. 

flirt  her,  thai  in  order  to  recover,  it  was  not  necessary  for  the 
plaintiff  to  introduce  such  evidence  as  would  convict  the  em- 
ployee of  the  crime  of  larceny  or  embezzlement,  as  defined  by 
the  laws  of  the  State. 

On  the  contrary,  a  clear  distinction  has  been  recognized 
between  the  terms  under  consideration  in  the  late  case  of 
United  States  Fidelity  &  Guaranty  Co.  vs.  Egg  Shippers' 
Strawboard  &  Filler  Co.,  148  Fed.  352,  where  in  construing 
a  corpporate  fidelity  bond  guaranteeing  against  loss  by  fraud 
and  dishonesty,  it  was  held  that  cases  involving  fidelity  bonds 
insuring  against  ''embezzlement  and  larceny"  or  "fraud  and 
dishonesty  amounting  to  embezzlement  or  larceny"  w^ere  ob- 
viously not  in  ])oint.  Likewise,  in  another  recent  case,  refer- 
ring to  the  usual  ])rovision  contained  in  a  corporate  fidelity 
bond,  wherein  the  obligor  imdertook  to  reimburse  the  em- 
ployer for  loss  by  reason  of  the  fraudulent  or  dishonest  acts 
of  the  employee  amounting  to  larceny  or  embezzlement,  the 
trial  Court  (approved  on  appeal)  said: 

"The  fraudulent  or  dishonest  acts  insured  against  in  the 
contract  before  us  may  be  classified  in  two  categories,  name- 
ly, fraudulent  or  dishonest  acts  in  violation  of  equity,  good 
conscience  and  the  civil  law,  and  fraudulent  and  dishonest 
acts  which  go  beyond  that  line,  and  subject  the  perpetrator 
of  them  to  the  penalties  of  the  criminal  law.  By  the  ex- 
press terms  of  this  bond  the  defendants  insure  against 
fraudulent  or  dishonest  acts  of  the  second  category  only, 
to  wit,  those  amounting  to  embezzlement  or  larceny." 

Reed  vs.  Fidelity  &  Casuahy  Co.,  1S9  Pa.  St.  596. 

94. — Strict  Proof  as  in  Criminal  Case  Not  Necessary  in  Civil  Ac- 
tion. 

While  there  is  a  clear  distinction,  as  has  been  shown,  be- 
tween the  terms  "fraud  or  dishonesty"  and  "fraud  or  dis- 
honesty amounting  to  lareenv  or  embezzlement,"  it  must  be 


FEAUD^     DISHONESTY^     EMBEZZLEMENT^     ETC.  127 

borne  in  mind,  as  pointed  out  by  the  Court  of  Appeals  of 
Kentucky  (Champion  vs.  Amer.  B.  &  T.  Co.,  115  Ky.  863), 
that  such  strict  proof  as  would  be  required  in  a  prosecution 
for  larceny  cr  embezzlement  is  not  required  of  a  plaintiff  in 
a  civil  action  to  recover  on  a  bond. 

Larceny  or  embezzlement  are,  however,  not  to  be  presumed ; 
they  must  be  proved. 

Fid.  &  Dep.  Co.  vs.  Mobile  Co.,  124  Ala.  144. 
Williams  vs.  United  States  Fidelity  &  Guaranty 

Co.,  105  Md.  490. 
Monongahela  Coal  Co.  vs.  Fid.  &  Dep.  Co.,  94 
Fed.  732. 

95. — Digest  of  Authorities. 

Illustration  of  what  acts  and  transactions  have  been  held 
to  create  liability  under  the  provisions  under  consideration 
and  others  similar  thereto  will  be  found  in  the  following- 
cases  : 

Defeadant  contracted  to  indemnify  plaintiff  against  any 
loss  arising  from  the  fraud  or  dishonesty  of  plaintiff's  agent 
in  his  management  of  plaintiff's  money  intrusted  to  him 
to  buy  cotton.  By  the  written  contract  with  plaintiff  the 
agent  agreed  that  such  money  should  be  kept  separate  from 
any  othei  funds,  and  that  on  demand  he  would  return  any 
unexpended  moneys  of  the  plaintiffs.  Held,  that  any  evi- 
dence tending  to  show  a  criminal  intenf  on  the  part  of  the 
agent  in  the  use  and  disposition  of  the  money  was  compe- 
tent, since  plaintiff  could  recover  on  the  guaranty  only  on 
showing  fraud  or  dishonesty. 

Clifton  Mfg.  Co.  vs.  United  States  Fidelity  &  Guar- 
anty Co.,  60  S.  C.  128. 

"Where  the  defendant  gave  a  bond  to  secure  the  plaintiff 
against  any  loss  "by  any  act  or  fraud  or  dishonesty"  of 


128  THE   LAW   OF   FIDELITY   BONDS. 

plainti'i's  ciiqiloycc,  the  defendant  by  such  bond  did  not 
guarantee  the  payment  of  the  employee's  debts  contracted 
with  the  plaintiff. 

Orion  Knitting  Mills  vs.  United  States  Fidelity  k. 
Guaranty  Co.,  137  N.  C.  565. 

The  petition  in  an  action  on  a  fidelity  bond  insuring 
a  corpor.Mtion  against  loss  through  the  fraud  or  dishonesty 
of  its  treasurer  states  a  cause  of  action  where  it  alleges  that 
such  treasurer  falsely  credited  himself  on  the  company's 
books  with  a  disbursement  which  he  did  not  make,  making 
him  short  in  his  accounts,  and  that,  having  authority  to 
execute  notes  and  accept  drafts  for  the  company  represent- 
ing its  valid  indebtedness,  and  not  otherwise,  he  accepted 
drafts  for  large  amounts  which  it  did  not  owe,  and  used  its 
funds  in  paying  the  same,  resulting  in  loss  to  it  through  the 
insolvency  of  the  drawer,  all  of  which  acts  he  concealed 
from  its  directors. 

Liability  on  a  fidelity  bond  insuring  an  employer  against 
loss  through  the  ''fraud  or  dishonesty"  of  an  employee  is 
not  limited  to  such  losses  as  result  from  his  criminal  acts, 
such  as  embezzlement  or  larceny,  but  such  words  have  a 
broader  meaning,  and  include  any  acts  which  show  a  want 
of  integrity  or  a  breach  of  trust. 

United  States  Fidelity  &:  Guaranty  Co.  vs.  Egg 
Shippers'  Strawboard  &  Filler  Co.,  148  Fed. 
352. 

A  surety  on  a  fidelity  bond  indemnifying  a  corporation 
against  loss  of  money  intrusted  to  its  treasurer,  through  the 
"embezzlement  or  larceny"  thereof  by  him,  is  not  liable  for 
money  intrusted  to  him,  and  for  which  he  failed  to  account, 
on  which,  while  in  his  hands  the  corporation  charged  him 
interest. 

Milwaukee  Theatre  Co.  vs.  Fidelity  6c  Cas.  Co.,  92 
Wis.  412. 


FRAUD^    DISHONESTY_,     EMBEZZLEMENT^    ETC.  129 

Suit  wtiS  brought  against  a  surety  company  on  an  indem- 
nity bond  given  to  a  fire  insurance  company  guaranteeing 
it  against  loss  through  larceny  or  embezzlement  by  an  agent 
of  the  insurance  company.  A  breach  was  alleged  in  the 
declaration  and  a  statement  filed  claiming  that  there  was  a 
balance  due  the  insurance  company.  The  employee  claimed 
the  right  to  credits  for  returned  premiums  and  expenses  in 
excess  of  the  balance  against  him,  and  defendant,  a  surety 
company,  executed  to  plaintiff  a  bond  by  which  it  agreed  to 
make  good  such  pecuniary  loss  as  plaintiffs  might  sustain 
during  a  certain  period  by  reason  of  any  fraudulent  or 
dishonest  act  of  plaintiffs'  agent  in  connection  with  his 
duties,  amounting  to  embezzlement  or  larceny. 

The  agent  paid  over  to  plaintiff  all  the  money  collected 
during  the  period  covered  by  the  bond,  but  he  directed  a 
part  of  the  same  to  be  credited  on  other  acounts  owing  to 
the  plaintiff,  without  knowledge  by  the  plaintiff  that  the 
money  collected  by  the  agent  from  certain  accounts  was  so 
applied  to  the  payments  of  other  accounts  for  which  the 
agent  was  also  liable.  Held,  that  this  action  amounted  to 
a  fraudulent  conversion  by  the  agent  of  the  money  collected 
and  that  the  defendant  is  liable  therefor  under  the  bond. 

American   Bonding  &  T.   Co.  vs.   Milwaukee  Har- 
vester Co.,  91  Md.  733. 

96. — Same. 

The  surety  company  filed  a  bill  of  particulars  with  one 
of  its  pleas  shoAving  a  balance  in  favor  of  the  plaintiff's 
case;  the  lower  Court  granted  the  defendant's  prayer,  in- 
structing the  jury  to  find  for  the  defendant  on  the  ground 
that  the  plaintiff  had  offered  no  evidence  legally  sufficient 
to  entitle  him  to  recover  under  the  pleadings,  and  judgment 
was  accordingly  entered  for  the  defendant. 

Held,  that  the  judgment  should  be  affirmed,  as  there  could 
be  no  recovery  in  this  case  for  any  acts  or  conduct  which 
fall  short  of  larceny  or  embezzlement,  and  that  the  claim 
of  the  employee  is  not  of  such  a  character  as  to  raise  a 
9 


lo(>  llli:    LAW    ()!•'    I-II)I-.I.I  IV     IJO.NDS. 

pinna  f'icic  prcsiiiniil  imi  oT  (lisliniicst y,  iiiiioiiiit  iiii';  to  lar- 
ceny or  riiihc/zlciiiciit,  and  tlial  the  ex  idcncc  was  not  h-f^ally 
suniciciii  to  warraiil  llic  fiii(liiii>;  of  a  vcinlict  for  the  jdaiii- 
tiff  uiidci-  the  bond. 

Vi'illiaiiis  vs.  United  States  Fidelity  t-V:  (jluaranty  Co., 
lO.")  M.(l.  J!)0. 

A  bond  of  a  surety  company  was  conditioned  tliat  if  the 
))rincipal,  a  corpoi-alion,  "sliall  in  any  manner  or  by  any 
means,  misuse^  niisappropriate,  or  misapply  said  paper  or 
plates"  ( to  be  furnished  by  the  obligee),  "or  in  any  manner 
dispose  of  same,  or  convert  them  to  their  own  use,  amount- 
ing to  larceny  or  embezzlement  of  paper  and  plates,  then 
this  bond  to  be  in  full  force."  The  principal  appropriated 
to  its  own  use  certain  paper  furnished  by  the  obligee,  and 
in  an  action  on  the  bond  the  surety  claimed  that,  as  a  cor- 
poration could  not  commit  larceny  or  embezzlement,  the 
surety  Avas  not  liable. 

Held,  that  the  effect  of  the  bond  was  to  raise  a  liability 
in  two  contingencies: 

If  the  principal  should  in  any  manner  misappropriate 
or  misa)>ply  the  ])aper;  and,  second,  if  it  should  in  any 
manner  amounting  to  larceny  or  embezzlement  dispose  of 
the  same  or  convert  it  to  its  own  use. 

K.   K.   Fairbank  Co.  vs.   American   Bonding  <&:   T. 
Co.,  97  Mo.  App.  205. 

Where,  in  a  suit  upon  a  bond  executed  to  a  loan  company 
guarantying  the  honesty  of  an  employee,  it  appears  that  it 
was  stipulated  in  the  application  for  such  bond  that  the 
duties  of  such  employee  are  to  receive  and  deposit  all  mon- 
eys received  by  the  company,  to  endorse  checks  for  deposit 
only,  and  not  authorized  to  sign  checks  or  accept  drafts,  or 
pay  out  on  account,  with  no  authority  to  Avithdraw  money, 
and  the  obligation  of  the  bond  is  to  make  good  any  loss 
occasioned  by  the  fraud  or  dishonesty  of  such  employee  in 
connection  with  his  duties  as  specified,  and  the  bondsman 


FEAUD^    DISHONESTY,,     EMBEZZLEMENT^,    ETC.  131 

not  to  be  liable  for  other  than  the  personal  acts  of  such 
employee  within  the  direct  scope  of  his  specified  duties,  the 
bondsiivin  will  not  be  held  for  the  dishonesty  of  such  em- 
ployee in  inducing  the  loan  company  to  accept  a  loan  to  a 
fictitious  person,  on  fictitious  security,  and  procuring  the 
money  fi-om  the  bank  where  moneys  of  the  company  are 
on  deposit  on  a  check  issued  by  the  company  in  the  name 
of  such  fictitious  borrower  by  forging  his  name  upon  the 
check. 

Livingston   vs.    Fidelity   &   Deposit   Co.,   81   X.    E. 
(Ohio)  330. 

Under  a  bond  for  indemnity  given  on  behalf  of  an  em- 
ployee appointed  as  agent  for  the  sale  of  merchandise  on 
commission,  which  by  its  terms  declares  that  its  true  intent 
and  meaning  are  that  the  surety  "shall  be  responsible  for 
moneys,  securities  or  property  diverted  from  the  employer 
through  fraud  or  dishonesty  on  the  part  of  the  employee," 
proof  that  on  settlement  of  accounts  between  them  there 
was  an  indebtedness  from  the  employee  to  the  employer  is 
not  of  itself  sufficient  to  authorize  a  recovery  by  the  em- 
ployer a.'j^ainst  the  surety,  as  such  indebtedness  may  have 
been  autliorized  by  agreement  between  the  employer  and 
employee,  or  by  their  course  of  dealing,  and  may  have  been 
incurred  without  any  fraud  or  dishonesty  on  the  part  of  the 
emplo^'ee. 

Monongahela  Coal  Co.  vs.  Fidelity  &  Deposit  Co.. 
94  Fed.  732. 

97. — Same. 

The  r-ct  of  a  bank  cashier  in  lending  the  funds  of  the 
bank  upon  imsecured  notes,  against  the  will  and  without 
the  authority  of  the  bank  may  constitute  embezzlement. 

United  States  Fidelity  &  Guaranty  Co.  vs.  Muir,  115 
Fed.  264. 


132  I'lIK    l-A\V    oi'    I'lItKLITV    Bf^N'D.S. 

The  merely  technical  conversion  of  property  is  not  a 
breach  ot  a  fidelity  bond  indemnifying  against  personal  dis- 
honesty. 

Sinclaii   &  Co.  vs.  National  Surety  Co.,  13:^  Iowa, 
541). 

There  is  no  authority  for  the  proposition  that  a  con- 
tract cannot  be  enforced,  or  that  action  on  it  must  be  sus- 
pended because  the  party  in  default  may  by  his  non-per- 
formance have  incurred  a  criminal  liability. 

Baum  vs.   Union    Surety  &  Guaranty  Co.,   19   Pa. 
Supr.  Ct.  23. 

Under  a  corporate  fidelity  bond  conditioned  for  reim- 
bursement for  any  loss  by  "fraud  or  dishonesty"  on  the 
part  of  an  agent  under  agreement  to  sell  goods  on  commis- 
sion, the  surety  is  liable  for  any  loss  growing  out  of  such 
fraud  or  dishonesty. 

United  States  Fidelity  k  Guaranty  Co.  vs.  Merkley 
&  Son,  23  Ky.  L.  R.  1570. 

In  an  action  upon  a  bond  securing  an  employer  against 
loss  by  reason  of  the  fraudulent  or  dishonest  acts  of  an 
employee  amounting  to  embezzlement  or  larceny,  a  non- 
suit is  properly  entered  where  there  is  no  evidence  to  show 
that  the  employee  personally  received  goods  shipped  to  him, 
or  that  they  had  been  in  his  actual  control,  or  that  he  had 
ever  rcL-eived  the  proceeds  of  the  sale  of  them. 

Keed  vs.  Tidelity  c^-  Casualty  Co.,  189  Pa.  St.  596. 

"A  man  cannot  be  found  guilty  of  fraud  or  dishonesty 
in  the  absence  of  criminal  intent." 

Clifton  Mfg.  Co.  vs.  U.  S.  F.  &-  G.  Co.,  60  S.  C.  128. 

Another  case  of  some  interest  in  this  connection  ilhistratina: 
the  difference  between  the  liability  of  the  sureties  of  a  public 


FRAUD^    DISHONESTY^     EMBEZZLEMENT^    ETC.  133 

officer  on  his  official  bond  and  that  of  the  surety  on  a  cor- 
porate indemnifying  bond  iiinning  to  the  sureties  on  the  offi- 
cial bond  is  United  States  Fidelity  &  Guaranty  Co.  vs.  Fos- 
sati,  97  Tex.  497.  where  it  is  held : 

In  a  suit  by  the  State  against  a  tax  collector  and  his 
bondsn^en  for  the  amount  of  taxes  coHected  and  not  paid 
over,  in  which  he  is  not  charged  with  criminal  conduct, 
but  only  with  default,  the  bondsmen  cannot  plead  over 
against  and  make  a  party  to  the  suit  a  guaranty  company 
which  has  given  to  them  a  bond  of  indemnity  againts  loss 
by  "any  act  of  fraud  or  dishonesty  amounting  to  larceny  or 
embezzlement"  on  the  part  of  the  collector,  the  issue  arising 
in  such  case  being  different  in  character  from  that  asserted 
by  the  State. 

98. — Crimes  by  National  Bank  Officers. 

As  to  what  constitutes  embezzlement  and  other  "Crimes  by 
I^ational  Bank  Officers,"  see  the  recent  treatise  on  that  sub- 
ject by  Terrell. 

See  also  the  following  cases : 

United  States  vs.  Harper,  33  Fed.  474. 

United  States  vs.  Lee,  12  Fed.  816. 

United  States  vs.  Cadwallader,  57  Fed.  677. 

United  States  vs.  Breese,  131  Fed.  918. 

United  States  vs.  Britton,  107  U.  S.  670. 

United  States  vs.  ITorthway,  120  U.  S.  333. 

Batchelor  vs.  United  States,  156  U.  S.  429. 

Coffin  vs.  United  States,  156  U.  S.  450. 

Classen  vs.  United  States,  142  U.  S.  146. 

99. — Terms   Construed  Substantially  as  Wrongful  Misapplication 
of  Funds. 

While  in  the  aforegoing  decisions  it  has  been  held  there  is 
a  clear  distinction  between  embezzlement  and  misapplication 


134  TIIK    l.AW    OK    l-'IDKLnV    IJONDS. 

of  I'liiids,  iiiid  while  c'<)r|i(n-ate  surety  bonds  usually  provide 
t'di-  iudeiiiuitv  I'oi-  aets  amountiu*;-  to  eiidx-z/Jenient  or  larceny, 
it  is  not  a])irehendcd  that  this  distinction  would  bo  recog- 
nized in  civil  actions  for  the  enforcement  of  liability  on  such 
bonds.  ^ 

1.— Set'  Cliaii.  fi,  sec,  !)4. 


LIABILITY    WHERE   DEFAULT   EXCEEDS   PEXALTY. 


135 


CHAPTER  VL 


Extent  of  Corporate  Sarety^s  Liability  on  Successive  Fidelity 

Bonds  where  Defaults  Occurred  During  more  than  one 

Term  and  Exceed  Penalty  of  Original  Bond. 


100.  Liability  of  surety   limited 

to     penalty     of     original 
bond. 

101.  Leading  case. 

101a.  Further  autliorities  in  sup- 
port of  rule  as  here 
stated. 


102.  Conflict— Surety    liable    on 

more  than  one  bond. 

103.  Same. 

104.  Liability      where      original 

bond  invalid. 


lOO. — Liability  of  Surety  Limited  to  Penalty  of  Original  Bond. 

It  is  now  well  settled  that  where  a  fidelity  bond  is  issued 
for  one  year  or  other  stated  period,  and  is  thereafter  period- 
ically renewed  or  continued  in  force  by  the  issuance  of  certifi- 
cates which  specifically  refer  to  and  adopt  the  terms  of  the 
original  instrument,  and  where  that  instrument  provides  that 
the  total  liability  of  the  surety  shall  not  exceed  the  penal 
sum  named  therein,  and  wher6  there  are  defaults  occurring 
during  the  original  term  and  also  during  one  or  more  renewal 
terms,  or  during  more  than  one  renewal  term,  in  such  case 
the  liability  of  the  surety  is  limited  to  the  penalty  of  the 
original  bond.  The  mere  statement  of  the  proposition  would 
seem  to  be  sufficient  to  indicate  the  rule  by  which  the  surety's 
liability  is  to  be  gauged,  but  a  determined  effort  has  been 
made  in  a  nnmbeT  of  cases  to  treat  each  renewal  certificate 
as  an  independent  contract,  and  to  hold  the  surety  for  loss 
under  the  original  bond,  and  under  the  renewals  where  loss 
occurred  for  such  respective  losses  up  to  the  penally  of  the 


i:m 


TiiK  I, AW  oi'  !■  ii)i:r,nv  uo.xds. 


Ixiud  :iii(I  of  ciich  certificate.  Foi'  example,  if  tiiei-e  I»e  aii 
<ii'i_uiiial  Idiiiil  i'nv  one  veai"  for  .$1, <•()(),  aiid  two  renewal  cer- 
tificates for  successive  years  in  like  penalty,  and  if  defalca- 
tions are  discovered  which  took  place  during  the  original  term, 
and  also  during  the  term  of  each  renewal,  such  defalcations 
amounting  in  each  term  to  iiioi-e  than  the  penalty  of  the  bond, 
it  has  been  contended  that  the  surety  is  liable  for  $3,000,  the 
aggregate  penalty  of  the  bond  and  renewals.  The  rule  is, 
however,  as  above  indicated,  that  the  surety  is  only  liable 
for  the  ]ienalty  of  his  bond. 

loi. — Leading  Case. 

Perhaps  the  leading  case  on  the  subject  is  First  National 
Bank  vs.  Fidelity  &  Guaranty  Co.,  110  Tenn.  10^  (1902), 
which  stated  the  law  as  follows: 

"A  bond  given  by  a  guaranty  company  to  indeniuify  a 
bank  for  loss  occasioned  by  the  fraud  or  dishonesty  of  its 
bookkeeper  provided  that  said  guarantor  would  make  good 
and  reimburse  said  bank  to  the  extent  of  $7,000,  and  no 
further,  all  pecuniary  loss  occasioned  by  said  bookkeeper, 
occurring  during  the  continuance  of  said  bond  or  any  re- 
newal thereof.  Liability  on  the  bond  was  limited  to  one 
year.  A  renewal  certificate  purporting  to  be  such,  and  to 
be  subject  to  the  conditioiis  of  the  original  bond  was  exe- 
cuted guaranteeing  the  fidelity  of  said  employee  for  the 
following  year.  By  the  fraud  and  dishonesty  of  said  em- 
ployee, the  bank  sustained  during  the  first  year  a  loss  of 
$7,217,  and  during  the  second  year  a  loss  of  $13,157.20. 
Action  to  recover  full  penalties  of  both  bonds. 

"Held,  that  the  renewal  certificate  was  a  new  contract 
only  so  far  as  it  extended  the  indemnity  provided  by  the 


1. — For  claim  against  another 
surety  company  prowins  out  of 
same  transactions,  see  First  Xat'l. 


Bank  vs.  Nat'l.  Surety  Co..  130 
Fed.  401.  Chapter  10.  sec.  113, 
post. 


LIABILITY   WHEEE   DEFAULT   EXCEEDS   PENALTY.  137 

original  bond  to  another  year,  and  that  there  was  in  fact 
only  one  bond,  with  one  penalty  of  $7,000,  to  which  the 
recovery  was  limited." 

xoia. — Further  Authorities  in  Support  of  Rule  as  Here  Stated. 

Several  very  recent  cases  in  different  States  have  adopted 
this  view: 

"A  renewal  certificate  of  a  bank  cashier's  guaranty  bond, 
which  provides  that  the  aggregate  liability  of  the  guaranty 
company,  from  the  date  of  the  issuance  of  the  bond  to  the 
expiration  of  the  renewal  certificate,  on  account  of  the 
acts  of  such  cashier,  shall  not  exceed  the  sum  written  oppo- 
site his  name  in  the  schedule,  limits  the  company's  total 
liability  to  the  face  value  of  the  original  bond  as  shown  by 
such  schedule,  and  does  not  give  an  additional  indemnity 
for  the  same  amount." 

United   States   Fidelity   &   Guaranty   Co.   vs.   First 
:tTat'l  Bank  of  Dundee,  233  111.  475. 

"The  renewal  of  a  fidelity  policy  constitutes  a  separate 
and  distinct  contract  for  the  period  of  time  covered  thereby, 
but  its  terms  and  conditions  are  evidenced  by  the  bond 
which  is  renewed  where  the  renewal  receipt  recites  that  it 
is  renewed  in  accordance  with  the  terms  of  the  bond." 

Long  Brothers  Grocery  Co.  vs.  United  States  Fidel- 
ity and  Guaranty  Co.,  130  Mo.  App.  421. 

A  corporate  fidelity  bond  in  the  penalty  of  $5,000  was 
issued  in  1901,  and  annually  renewed  by  renewal  certifi- 
cates, the  last  one  covering  the  period  from  June,  1903,  to 
June,  1904.  Suit  was  subsequently  instituted  on  the  con- 
tract for  $5,000,  and  recovery  was  permitted  to  the  extent 
of  $4,409.23,  the  amount  of  embei^zlement  found  to  have 
occurred  during  the  period  covered  by  the  last  renewal. 


138  Till-;    LAW    OK    I'lDKLnv     UO.NDS. 

The  total  ciiihc/./.Iciiiciit  ainouiitcd  to  about  $7,000,  and  was 
coiiiiiiiitcd  diiriiii,^  tlic  last  two  years  of  the  contract. 

Aetna  Ind.  Co.  vs.  J.   K.  Crowe  Coal  and  Mining 
Co.,  154  Fed.  545. 

"Where  a  bond  issued  by  a  surety  company  indemnify- 
ing an  employer  against  default  of  an  employee  for  a  cer- 
tain amount  provided  that  it  should  not  lapse  at  the  end 
of  the  term  if  renewed,  but  that  the  liability  of  the  surety 
should  not  be  cumulative,  the  total  liability  for  the  whole 
period  represented  by  the  original  term  and  renewal  periods 
was  limited  to  the  amount  specified  in  the  bond." 

Am.  Bonding  Co.  vs.  Morrow,  96  S.  W.  (Ark.)  613. 

The  other  cases  limiting-  the  liability  as  here  shown  are 
as  follows : 

Florida  Cent.  &  P.  R.  R.  Co.  vs.  Am.  Sur.  Co.. 

99  Fed.  674. 
Proctor  Coal  Co.  vs.  United  States  Fidelity  & 

Guaranty  Co.,   124  Fed.   424. 
Lombard  Tnv.  Co.  vs.  Am.  Surety  Co.,  05  Fed. 

476. 
De  Jeimettc  vs.  Fidelity  <S:  Casualty  Co..  17  Ky. 

Law  Eep.  1088. 
Mayor,  &c.,  vs.  LTarvey,  114  Ga.  73.3. 

I02. — Conflict — Surety  Liable  on  More  Than  One  Bond. 

In  conflict  with  the  above  and  all  other  cases  on  the  subject 
is  Hawley  vs.  United  States  Fidelity  &  Guaranty  Co..  100 
App.  Div.  (IST.  Y.)  12\  reference  to  which  will  show  that 
there  were  two  orisrinal  bonds,  and  a  default  under  each,  the 
agcri-egate  amount  of  which  did  not  amount  to  as  much  as 
the  penalty  of  either  bond.     The  Court  so  interpreted  the 

1. — See  discussion  of  this  case, 
riiapter  1.  soc.  IS.  note. 


LIABILITY   WHERE   DEFAULT   EXCEEDS   PENALTY.  139 

language  of  those  instruments  as  to  permit  a  recovery  of 
amounts  misappropriated  under  each  bond.  jSTo  authority  is 
cited  in  support  of  that  case.  All  the  cases  are  against  it, 
and  it  has  not  been  followed  by  the  later  decisions. 

103. — Same. 

It  must  be  borne  in  mind  that  a  determination  of  the  ques- 
tion as  to  whether  recovery  is  limited  to  one  penalty  or  the 
default  under  the  last  undertaking,  or  whether  recovery  may 
be  had  upon  each  of  se^'eral  undertakiTigs  depends  upon  the 
facts  of  eacli  case,  and  the  particular  language  used  in  the 
contracts.  The  aforegoing  decisions,  with  one  in  conflict,  il- 
lustrate the  first  view.  An  illustration  of  the  second  view 
will  be  found  in  the  case  of  Sherman  vs.  Harbin,  125  Iowa, 
174,  in  which  an  undertaking,  more  in  the  nature  of  a  com- 
mon law  obligation  than  the  usual  form  of  corporate  fidelity 
bond,  was  executed  for  a  term,  and  subsequently  a  certificate 
was  issued  "goiaranteeing  the  fidelity'  of  the  risk  for  another 
term,  subject  to  all  the  terms  and  conditions  of  the  original 
obligation.  The  Court  distinguished  that  case  from  that  of 
First  E'ational  Bank  vs.  Fidelity  &  Guaranty  Co.,  110  Tenn. 
10,  and  permitted  a  recovery  for  the  full  penalty  of  the  origi- 
nal bond,  as  well  as  of  the  certificate. 

104. — Liability  Where  Original  Bond  Invalid. 

Another  question  which  sometimes  arises  in  this  class  of 
cases  is  as  to  the  liability  of  the  surety  upon  a  renewal  or 
continuation  certificate  where  the  original  obligation  is  in- 
valid, as,  for  example,  where  the  obligation  is  not  executed  by 
the  principal,  such  execution  being  made  a  requisite  to  the 
validity  of  the  instrument.  If  the  renewal  is  issuc^d  by  the 
surety  with  knowledge  of  the  invalidity  of  the  original  instrn- 
ment,  it  goes  without  saying  that  it  cannot  subsequently  be 
heard  to  complain  thereof.    Where  the  renewal  is  issued  with- 


•  !•*  TIIK   LAW    OF    KIDKLITV   BONDS. 

uul  knowledge  ul'  the  invalidity,  Llic  cases  are  not  in  burniuny, 
owning  possibly  to  the  different  circumstances  in  the  several 
cases. 

In  North  St.  Louis  Bldg.  &  Loan  Assn.  vs.  Obert,  169 
Mo.  507,  it  was  held  that  where  the  penalty  of  an  original 
fiduciary  bond  has  been  exhausted,  there  can  be  no  recovery 
on  a  ''renewal  bond"  which  was  not  signed  by  the  defaulting 
principal. 

In  Proctor  Coal  Co.  vs.  United  States  Fidelity  &  Guaranty 
Co.,  124  Fed.  424,  it  was  held  upon  the  allegations  in  a  de- 
luurri^r  that  whero  a  fidelity  insurance  company  had  received 
premiums  for  two  renewals  of  a  bond,  with  knowledge  that 
the  bond  was  not  signed  by  the  employee  whose  fidelity  was 
insured,  as  required  by  the  bond,  it  was  estopped  to  set  up 
the  absence  of  such  signature  to  prevent  a  recovery  on  the 
bond. 

In  the  recent  case  of  Aetna  Ind.  Co.  vs.  J.  R.  Crowe  Coal 
&  Mining  Co.,  154  Fed.  545,  it  was  held  that  where  the  exe- 
cution by  a  servant  of  an  employers  liability  bond  was  not 
made  a  consideration  for  nor  a  condition  of  the  creation  of 
liability  by  the  insurer,  but  the  latter  thereafter  continued  the 
bond,  which  was  not  signed  by  the  servant,  three  times  for  a 
further  consideration,  subject  to  the  provisions  and  covenants 
of  the  bond,  defendant  was  not  entitled  to  object  that  it  was 
not  liable  on  the  last  renewal,  because  the  bond  was  not  origi- 
nally signed  by  the  servant,  as  contemplated,  although  there 
is  no  evidence  tending  to  show  that  the  surety  had  knowledge 
when  the  renewals  were  issued  that  the  original  bond  had  not 
been  signed.^ 

2. — See  Chaitter  17,  on  Succes- 
sive Bonds. 


FIDELITY    BOND    FILED   AS    OFFICIAL    BOND.  141 


CHAPTER  Vn, 

LIABILITY    OF    SURETY    UPON    CORPORATE   FIDELITY 

BOND    FILED    AS    THE    OFFICIAL    BOND    OF 

A    PUBLIC    OFFICER. 

105.     Surety  liable  as  upou  statu-  i   107.     Holding    that    surety    only 


tory  bond. 
106.     False   inducement  will   not 
relieve  surety. 


liable  in  accordance  with 
his  contract. 


105. — Surety  Liable  as  Upon  Statutory  Bond. 

This    questioii    was    squarely    presented    to    the    Supreme 
Court  of  Alabama  in  two  recent  cases.     The  Court  held : 

In  a  soit  on  a  corporate  fidelity  bond  filed  by  a  register 
in  chancery  as  his  official  bond,  it  was  held  that  a  bond 
intended  by  the  obligor  thereon  to  be  the  official  bond  of  a 
public  officer,  under  which  said  public  officer  acts,  is  by 
force  of  the  local  statute  the  official  bond  of  such  officer, 
and  in  legal  contemplation  and  effect  such  bond  is  payable 
and  conditioned  as  statute  requires  the  official  bond  of  such 
officer  to  be  payable  and  conditioned,  and  it  is  therefore  of 
no  consequence  that  the  bond  so  executed  is  payable  and 
conditioned  differently  from  that  Avhich  the  statute  requires 
for  official  bonds,  or  that  the  conditions  expressed  in  the 
bond  may  not  have  been  broken  by  the  officer. 

U.  S.  Fidelity  &  Guaranty  Co.  vs.  Union  Trust  & 
Savings  Co.,  142  Ala.  532. 

Another  case  in  which  the  Court  refused  to  enforce  the 
provisions  of  the  bond  as  filed  is  that  of  Ignited  States  Fidel- 


142  'Jill.    J. AW    OF    I  lUKMTV    DOMKS. 

it  J  \-  ( iiKii  aiily  Ci).  \\s.  j\lcl-,aiiglilin,   107  A'.  W.  .")77  (Xeb.  j 
lUi)  .\.  W.  ;;:>0,  where  it  was  held: 

111  ail  actiuu  by  u  county  treasurer  against  a  guaranty 
fonipaiiy  on  a  coijiorati'  lidelity  bond  siniilai'  to  tbcjse  exe- 
cuted on  behalf  ol'  private  eiiiployeciS,  reciting  the  appoint- 
nient  of  one  as  dei)uty  treasurer,  and  conditioned  to  make 
good  his  defaults  caused  by  any  act  of  fraud  or  dishonesty, 
and  oi-curiiiig  during  the  continuance  of  the  bond  or  an}' 
renewal  thereof,  and  discovered  during  said  continuance 
or  within  six  months  thei-eafter,  and  where  the  bond  and 
renewal  covered  a  period  ending  in  January,  11)02,  during 
Avhich  the  deputy  misapi)ropriated  a  large  sum  and  where 
his  dishonesty  was  not  discovered  until  1904,  it  was  eon- 
tcMided  on  behalf  of  defendant  that  the  alleged  deputy  was 
but  a  clerk  and  his  obligation  a  private  one  and  not  an 
oilicial  bond,  as  required  by  statute,  and  that  an  action  on 
the  sauic  was  barred  by  limitations.  Held,  that  a  bond 
given  for  the  faithful  discharge  of  the  duties  of  one  legally 
intrusted  with  State  and  county  funds  is  an  official  bond, 
and  the  statutory  provisions  relative  thereto  enter  iiito  and 
become  a  part  ol  the  contract. 

Held,  further,  on  rehearing  that  the  clause  limiting  the 
right  of  action  to  such  default  as  shall  be  discovered  during 
the  continuance  of  the  bond,  or  within  six  months  there- 
after, cannot  be  enforced. 

io6. — False  Inducement  Will  Not  Relieve  Surety. 

So,  in  a  late  Pennsylvania  case  the  Court  enforced  liabil- 
ity asrainst  the  surety  of  a  tax  collector  not^rithstandin2;  the 
fact  that  the  surety  had  sought  and  obtained  from  the  attor- 
ney for  the  county  treasurer  a  written  ecrtiiieate  as  to  the 
condition  of  the  accounts  of  the  collector,  which  certificate 
was  false. 

There  is  no  official  duty  on  the  part  of  the  county  treas- 
urer to  examine   the  account  of  a   tax  collector  with  the 


FIDELITY    BOND    FILED   AS    OFFICIAL    BOND.  143 

county  and  mate  report  thereon  to  a  person  who  proposes 
to  become  surety  for  the  collector  for  the  ensuing  year.  If 
he  does  so,  he  is  the  mere  agent  of  the  surety  to  do  what 
he  is  not  officially  obliged  to  do,  and  if  he,  or  his  attorney 
duly  authorized,  makes  false  answers  to  the  questions  pro- 
pounded by  the  proposed  surety,  the  county  is  not  responsi- 
ble for  such  answers,  and  the  surety  is  not  relieved  from 
liability  on  its  bond  by  reason  of  them. 

Whetlier  if  the  surety  had  called  upon  the  treasurer  for 
a  certificate  from  his  official  accounts,  which  he  was  bound 
to  correctly  keep,  of  the  balances  against  the  collector  for 
certain  3^ears  specified,  and  he  had  as  treasurer  furnished  a 
false  statement,  the  surety  would  have  been  relieved,  not 
decided. 

C'oramonwealth  vs.  American  Bonding  Sz  Trust  Co., 
205  Pa.  St.  372. 

A  corporate  surety  bond  given  under  the  requirements  of 
the  dispensary  law  of  South  Carolina,  but  not  conditioned 
as  required  by  statute,  held  good  as  such  statutory  bond,  al- 
though not  in  conformity  with  the  statutory  requirements. 
In  so  far  as  stipulations  in  the  bond  inserted  for  the  benefit 
of  the  makers  were  repugnant  to  the  statute,  they  must  be 
regarded  as  null  and  void. 

W  alker  vs.  Holtzlaw,  57  S.  C.  459. 

107. — Holding  that  Surety  Only   Liable  in   Accordance  With  His 
Contract. 

In  Mayor  vs.  Harvey,  114  Gra.  733,  the  Supreme  Court  of 
Georgia  held:  "Where  a  fidelity  and  guaranty  company  en- 
ters into  a  bond  with  the  authorities  of  a  municipal  corpora- 
tion to  guarantee  the  city  against  the  fraud  and  dishonesty 
of  the  city  treasurer,  the  obligation  thus  given  is  not  a  statu- 
tory but  a  voluntary  bond,"  and  held  further,  that  the  surety 
was  not  liable  for  defaults,  except  within  the  terms  of  its 
bond. 


II  I  Till'     l-AW    OI-    III)i;Mrv     ItO.NDS. 

Tlu'   rule   is   thus  stated   1)}'   the  appclliitx!  ('oiiri    >>{'   West 
Vii-iiiin,  ('liiiiiilH'rs  vs.  ('line,  00  \V.   \'a.  588: 

Wlicii  a  l»()ii(l  is  given  under  the  authority  of  a  statute, 
that  \vhl<di  is  not  expressed,  but  should  have  been  incorpo- 
rated, iy  included  in  the  bond;  while  that  which  is  not  re- 
quired by  the  statute  is  excluded,  if  it  is  sufficiently  clear 
from  the  bond  itself  that  the  intention  of  the  parties  was 
'  to  comply  Avith  the  law  in  its  execution. 

And  to  the  same  effect  is — 

State  vs.  Smith,  87  Miss.  551 


CULPABLE    NEGLIGENCE. 


145 


CHAPTER  VIIL 


CULPABLE    NEGLIGENCE. 
lOS.     Elastic  term  in  insurance.     I  109.     Illustrations. 


io8. — Elastic  Term  in  Insurance. 

While  many  corporate  fidelity  bonds  guarantee  against 
loss  by  the  "culpable  negligence"  of  the  risk,  and  some  pro- 
ceed to  define  the  temi,  there  appear  to  have  been  but  few 
adjudicated  cases  pertaining  to  this  particular  branch  of 
insurance.  The  term  as  used  in  the  law  of  insurance  is  an 
exceedingly  elastic  one,  and  much  difficulty  is  experienced 
in  practice  in  determining  the  respective  rights  of  parties  to 
a  contract  containing  this  clause.  In  the  absence  of  other 
authority  reference  must  be  made  to  the  analogies  of  the  law 
in  the  application  of  its  piinciples. 

1 09. — Illustrations. 

In  United  States  Fidelity  &:  Guaranty  Co.  vs.  Des  Moines 
'Nat.  Bank,  145  Fed.  273/  it  was  held: 


1. — See  anotlaer  case  involving 
the  disappearance  of  a  specific 
sum  of  money — Fidelity  &  Cas. 
Co.  vs.  Bank  of  Timmonsville,  139 
Fed.  101,  Chap.  12,  sec.  120,  post. 

A  teller  of  a  bank  is  not  liable 
for  losses  incurred  during  his  ab- 
sence from  the  bank.  Bank  of 
U.  S.  vs.  Johnson.  3  Cr.  C.  C.  228. 

Where  a  person,  who  alone  is 
charged  with  the  duty,  in  his  em- 
ployment, of  recieving  and  dis- 
bursing funds  and  of  keeping  the 
books  of  account,  and  the  books 
10 


show  the  receipt  of  funds  of 
which  there  is  no  acount  of  dis- 
bursement, and  there  is,  in  fact, 
a  deficiency  shown  by  the  books 
to  exist,  the  legal  presumption  is 
that  the  person  wliose  duty  it  was 
to  receive  any  funds  did,  in  fact, 
receive  them,  and  no  explanations 
being  made,  that  he  has  dishon- 
estly appropriated  them  to  his 
own  use.  Guarantee  Co.  vs.  Mutl. 
Bldg.  &  Loan  Assn.,  57  111.  App. 
254. 


140  iiii;  LAW  OK  I  ii)i;i,nv   isonds. 

Ill  an  iiclidu  upon  a  Ixtiid  wlici'cby  a  guaranty  c-oiiipany 
agrees  to  make  good  and  rcimhurso  to  an  employer  any 
pecuniary  loss  sustained  by  him  tiirough  the  personal  dis- 
honesty or  fulpable  negligence  of  an  employee  in  connec- 
tion will'  I  he  duties  of  his  employment,  and  wherein  "cul- 
pable negligence"  is  defined  to  mean  "failure  to  exercise 
that  degree  of  care  and  caution  which  men  of  ordinary  pru- 
dence and  intelligence  usually  exercise  in  regard  to  their 
own  affairs,"  it  is  error  to  instruct  the  jury  that  the  degree 
of  care  and  caution,  failure  to  exercise  Avhich  on  the  part 
of  the  employee  will  rendei-  the  guaranty  company  liable 
for  a  resultant  loss,  is  "the  very  highest,  you  might  almost 
say,  the  highest  possible,"  "the  very  highest,"  and  "extraor- 
dinary and  a  very  high  degree." 

Held,  further  in  this  case  that  the  loss  of  money  from  a 
bank  vault  to  which  others  than  the  teller  on  whose  bond  the 
suit  was  brought  had  access  was  not  recoverable  under  the 
culpable  negligence  clause. 

Another  comparatively  recent  case  dealing  with  the  sub- 
ject is — 

City  Trust,  Safe  Deposit  and  Surety  Co.  vs. 
Fidelity  and  Casualty  Co.,  58  App.  Div. 
(N.  Y.)  18,  (1901). 

In  an  action  brought  by  a  guaranty  company  which  had 
insured  a  railway  company  against  loss  by  reason  of  "the 
personal  dishonesty  or  culpable  negligence"  of  its  collector- 
general,  to  recover  from  another  guaranty  company  which 
had  reinsured  a  portion  of  the  risk,  its  proportionate  share 
of  a  loss  paid  by  the  first-mentioned  corporation,  arising  out 
of  the  fact  that  a  canvas  bag  of  bills  was  taken  from  the 
possession  of  the  collector-general,  evidence  was  given  tend- 
ing to  show  that  the  collector  drove  up  to  a  bank  for  the 
purpose  of  depositing  six  bags  of  coin  and  one  of  bills ;  that 
he  unlocked  the  monor  box,  which  was  located  back  of  the 


CULPA15LE    NEGLIGENCE.  147 

seat,  aud  placed  the  bag  of  coin  in  the  front  of  the  wagon 
by  the  dashboard;  that  he  then  locked  the  money  box  and 
placed  the  canvas  bag  containing  the  bills  behind  him  on 
the  lid  of  the  money  box,  and  handed  the  driver  two  bags 
of  coin;  that  after  the  driver  had  carried  the  bags  of 
coin  into  the  bank  the  collector  gave  him  two  more,  hav- 
ing meanwhile  seen  that  the  canvas  bag  was  safe ;  that  after 
the  driv(;r  had  gone  into  the  bank  with  the  second  set  of 
bags  a  man  approached  the  wagon  and  said  something  to  the 
collector,  which  he  was  unable  to  understand;  that  the  col- 
lector again  looked  and  saw  the  bag  of  bills,  and  then  hand- 
ed the  driver  the  two  remaining  bags  of  coin ;  that  he  then 
turned  aud  discovered  that  the  bag  of  bills  had  disappeared. 
The  wagon  was  so  constructed  that  a  person  taking  the  bag 
must  have  climbed  upon  the  wheel  and  into  the  wagon  and 
reached  by  the  collector  over  the  seat  to  where  the  bag  was 
placed  and  have  escaped  without  attracting  the  collector's 
attention,  l^o  charge  was  made  of  dishonesty  on  the  part 
of  the  collector.  Held,  that  the  fact  of  disappearance  of 
the  bag  under  the  circumstances  raised  a  presumption  of 
"culpablti  negligence." 

That  the  question  whether  the  collector  was  guilty  of 
culpable  negligence  was  properly  submitted  to  the  jury  and 
that  their  verdict  in  favor  of  the  plaintiff  should  not  be 
disturbed. 

Reference  is  also  made  to  the  following  cases : 

Under  the  fidelity  bond  of  general  insurance  agents  con- 
ditioned that  they  should  in  all  respects  observe  the  instruc- 
tions of  rheir  ju'incipal,  and  that  they  should  in  all  respects 
well  and  faithfully  perform  their  duties  as  such  agents,  the 
surety  is  liable  for  a  loss  sustained  by  the  employer  by  rea- 
son of  the  neglect  of  the  agents  to  cancel  a  policy  Avhen  di- 
rected to  do  so  by  their  employers,  under  which  there  was  a 
subsequent  claim  paid  by  the  employers. 

I^orthern  Ins.  Co.  vs.  Borgelt,  93  N".  W.  226  (Neb.). 


148  TIIK    l.AW    or    IIDKLITV    UOXDS. 

Where  a  fidelity  bond  was  conditioiied  against  loss  by 
reason  or  in  eonsequence  of  the  willful  default  or  culpable 
neglect  of  the  employee  in  or  arising  out  of  his  employment 
with  the  insured,  and  where  it  was  the  duty  of  the  em- 
ployee to  make  a  weekly  inspection  of  the  accounts  of  the 
clerks  under  him,  and  where  he  neglected  to  do  so,  and  in 
consequence  the  embezzlements  of  a  clerk  extending  through 
a  year  were  undiscovered,  and  the  insured  sustained  loss 
thereby,  the  surety  was  held  liable. 

Colonial  Bank  vs.   European  Ins.  &  Guar.  Soc,   1 
Wyatt  (Can.)  15. 


INFORMATION    FOR  ARREST,    ETC.  149 


CHAPTER  IX. 

Effect  on  Sttrety^s  Liability  of  his  requiring  without  denial  of 

Liability,  further  action  by  Obligee  in  perfecting  proofs 

of  loss,  making  Information  for  Arrest,  or  the  like ; 

or  in  himself  making  settlement  with  or 

securing  prosecution  of  risk. 


111.     Illustrations. 


llO.  Surety  must  not  indicate 
acceptance  of  liability,  take 
or  require  further  action 
and  then  repudiate. 


no. — Surety  Must  Not  Indicate  Acceptance  of  Liability,  Take  or 
Require  Further  Action,  and  Then  Repudiate. 

The  decisions  on  this  point,  sometimes  a  practical  and  im- 
portant one,  are  too  few  to  permit  the  dedtiction  of  any  gen- 
eral rule,  further  than  to  say  that  the  law,  which  deals  with 
the  substance  of  things,  looks  to  the  acts  of  the  surety  rather 
than  to  his  intentions  as  subsequently  declared,  and  will  not 
permit  him  by  a  course  of  conduct  to  lead  the  insured  to 
believe  his  claim  is  accepted  and  to  subsequently  repudiate  it. 

Ill . — Illustrations. 

Reference  may  be  had  to  the  following  cases  illustrative 
of  the  proposition: 

The  rule  is  that,  when  an  insurance  company  becomes 
aware  that  all  rights  under  a  policy  has  been  lost,  it  cannot, 
for  an  indefinite  period,  disguise  its  purpose  to  resist  pay- 
ment of  the  loss,  by  affirmative  action,  which  would  nat- 


inO  TJIK    LAW    OF   I'IDKMTY    BONDS. 

urallj  lead  the  insured  to  believe  that  it  admitted  its  lia- 
bility and  intends  to  discharge  it. 

Missouri  K.  &  T.  Trust  Co.  vs.  German  Nat.  Bank, 
77  Fed.  119. 

A  surely  company  had  executed  a  bond  to  a  bank  insur- 
ing the  iid6lity  of  one  of  its  employees ;  said  employee  was 
afterwards  found  to  be  a  defaulter,  and  soon  after  this  dis- 
covery the  surety  company  learned  that  in  his  application 
to  it  for  the  bond,  the  employee  had  understated  his  in- 
debtedness to  the  bank  by  some  $3,700.  Without  disclaim- 
ing liability  on  the  bond,  the  surety  company,  in  conjunc- 
tion Avith  the  bank,  proceeded  to  take  security  from  the  em- 
ployee and  to  attach  his  property.  Afterwards,  being  sued 
by  the  bank  on  the  bond,  the  surety  company  set  up  the 
employee's  misstatement,  as  a  defense.  Held,  that  it  was 
not  error  to  submit  to  the  jury  the  question  whether  the 
surety  company,  by  proceeding  after  it  kncAv  the  facts  to 
take  security  from  the  employee,  without  notifying  the  bank 
that  it  disclaimed  liability,  had  waived  the  defense. 

Missouri,  K.  &  T.  Trust  Co.  vs.  German  N'at.  Bank, 
77  Fed.  119. 

The  fact  that  a  surety  company  which  was  surety  on  the 
bond  of  a  bank  cashier,  after  notice  of  his  defalcation,  sent 
an  agent  to  examine  the  books  of  the  bank,  and  also  took 
steps  for  the  arrest  of  the  defaiilter,  does  not  estop  it  to 
deny  the  validity  of  the  bond  on  discovering  that  its  re- 
newal was  procured  by  the  bank  after  the  defalcation  took 
place,  and  the  cashier  had  absconded,  where  the  bank  was 
placed  in  no  worse  position  by  such  acts. 

!N'ational  Bank  of  Ashville  vs.  Fidelity  &  Casualty 
Co.,  89  Fed.  819. 

"Where  a  surety  company  sent  an  inspector  to  investigate 
a  loss,  who  stated  that  the  company  would  require  the  books 
to  be  checked  by  an  expert,  and  at  his  suggestion,  one  was 


INFOKMATION  FOR  AREEST,  ETC.  151 

employed,  held,  that  the  company  was  charged  with  knowl- 
edge of  what  might  be  ascertained  so  as  to  constitute  a 
waiver  of  notice,  and  that  this  question  was  properly  sub- 
mitted to  the  jury,  notwithstanding  the  fact  the  contract 
prohibited  a  waiver  by  the  inspector. 

Perpetual  B.  &  L.  Assn.  vs.  U.  S.  Fidelity  &  Guar- 
anty Co.,  118  Iowa,  729. 

Where  the  insurer,  in  an  employer's  indemnity  policy, 
made  no  objection  on  the  ground  that  it  had  not  been  im- 
mediately notified  of  the  employee's  embezzlement,  but 
called  on  the  employer  to  make  an  effort  to  effect  a  settle- 
ment with  the  employee,  and  then  required  him  to  make  an 
itemized  proof  of  loss,  and  subsequently  called  on  the  em- 
ployer to  take  steps  for  the  criminal  prosecution  of  the  em- 
ployee, and  in  an  action  on  the  policy  failure  to  give  imme- 
diate iiotice  was  not  relied  on  as  a  defense,  it  was  waived. 
Goldman  vs.  Fidelity  &  Deposit  Co.,  125  Wis.  390. 


152  THE   LAW    OF    MDKLITY    BONDS. 


CHAPTER  X. 

APPLICATION   OF    SALVAGE. 


112.  Apjjlied  first  to  reduction  of 

unsecured  loss. 

113.  Digest  of  authorities. 


114.     Discussion  of  uiiiuncr  of  ap- 
plication. 


112. — Applied  First  to  Reduction  of  Unsecured  Loss. 

Where  voluntary  restitution  has  been  made  bv  a  default- 
ing employee  of  a  ])art  of  the  amount  wrongfully  taken,  or 
where  partial  recovery  has  been  made  by  the  employer  from 
the  employee,  or  from  other  sources  on  behalf  of  the  latter, 
and  in  cases  where  there  are  more  than  one  surety  involved 
in  the  transaction,  the  question  of  the  application  of  such 
partial  recovery  arises.  The  cases  are  limited  in  number  and 
too  few  to  permit  of  the  deduction  of  any  general  rule,  other 
than  the  law,  looking  at  all  the  circumstances,  will  seek  to 
do  substantial  justice  between  the  ]nirtios,  and  will  ordinarily 
apply  such  recovery  to  any  unsecured  loss  in  cases  where  the 
loss  exceeds  the  security. 

113. — Digest  of  Authorities. 

Reference  is  here  given  to  the  cases  dealing  with  the  appli- 
cation of  salvage  or  recovery  under  circumstances  as  above 
indicated : 

When  there  are  different  bonds  given  by  a  bank  official, 
covering  different  periods  of  time,  Avith  different  sureties, 
an  imappropriated  payment  made  by  the  common  princi- 

1. — See  Chapter  11,  Application 
of  Payments. 


APPLICATION    OF    SALVAGE.  153 

pal  is  not  to  be  always  applied  by  the  Court  to  the  oldest 
obligation.  Regard  must  be  had  to  the  responsibility  of 
the  diti'erent  sureties,  as  limited  by  the  period  for  which 
they  respectively  contract,  as  well  as  to  the  injustice  that 
would  ensue  if  collections  received  under  one  obligation 
are  applied  to  the  discharge  of  a  liability  under  a  preceding 
or  succeeding  term,  with  distinct  sureties. 

Defendant,  a  surety  company,  executed  a  bond  to  plaintiff 
bank  by  which  it  undertook,  for  the  term  of  one  year,  to 
indemnify  plaintiff  against  loss  sustained  by  the  dishonesty 
of  employees.  Action  was  brought  therein  to  recover  for 
loss  alleged  to  have  occurred  during  the  term  through  the 
action  of  a  bookkeeper  in  falsifying  the  accounts  of  a  de- 
positor so  as  to  increase  his  apparent  credit  balance  by 
which  he  was  enabled  to  and  did  overdraw  his  account  to  a 
large  amount.  Such  false  entries  and  overdrafts  continued 
through  four  year?,  but  defendant's  bond  covered  only  about 
three  months  of  the  last  part  of  the  bookkeeper's  employ- 
ment, there  having  been  bonds  with  different  sureties  cover- 
ing a  portion  at  least  of  the  previous  time.  The  depositor's 
account  was  the  ordinary  running  account,  subject  to  check, 
and  continuous  all  the  time,  and  no  application  of  deposits 
to  any  particular  item  of  debit  was  made  by  either  party, 
nor  by  implication,  there  having  at  no  time  been  an  over- 
draft as  shown  by  the  books.  The  false  entries  and  over- 
drafts continued  for  a  part  of  the  time  after  defendant's 
bond  went  into  effect,  but  subsequent  deposits  made  prior  to 
the  time  the  bookkeeper's  employment  terminated  exceeded 
the  checks  paid  during  the  same  time  in  an  amount  greater 
than  such  overdrafts. 

Held,  that  the  ordinary  rule  in  such  cases  between  debtor 
and  creditor^  that  payments  should  be  appropriated  to  the 
oldest  item  of  indebtedness,  could  not  be  applied  as  against 
a  surety  whose  obligation  covered  a  distinct  portion  of  the 
time  during  w^hich  the  account  was  running,  but  that  as  be- 
tween plaintiff  and  defendant  all  deposits  made  during  the 
currency  of  the  bond  would  be  applied  by  the  Court  to  the 


l.-i-l 


'nil':    LAW    (»]••    J  IDi.Lll'V    I'.O.NJJS. 


(lc'l)il  items  made  during  tlie  same  lime,  and,  it  appearing 
that  tlicy  exceeded  the  sums  drawn  mit,  tliere  was  no  loss  to 
tlie  hank  for  whi(di  defendant  was  liable. 

First  Nat.  Bank  of  Nashville  vs.  National  Surety 
Co.,   130   Fed.   401.2 

Property  was  turned  over  by  the  defaulting  cashier  of 
a  bank  to  the  president  thereof,  as  trustee,  to  secure  to  that 
extent  his  indebtedness  to  the  bank  by  reason  of  his  defal- 
cations. This  was  done  without  designation  as  to  what  part 
of  the  indebtedness  this  credit  should  be  applied. 

Held,  that  in  the  absence  of  a  designation  as  to  the  items 
upon  which  this  credit  should  apply,  the  law  upon  equitable 
principles  will  imply  that  the  debtor  intended  that  it  should 
be  used  in  payment  of  that  part  of  his  indebtedness  which, 
was  the  most  precarious. 

Fanelier  vs.  Kaneen,  5  Ohio  Xisi  Prius,  n.  s.  614. 

A  voluntary  conveyance  of  property  to  a  building  and 
loan  association  by  its  secretary  who  had  misappropriated 
its  funds,  with  the  request  that  it  be  applied  to  the  first 
items  of  indebtedness,  is  not  a  settlement  relieving  a  surety 
company  from  liability  on  its  bond. 

Perpetual  B.  <fc  L.  Assn.  vs.  U.  S.  Fidelity  &  Guar- 
Co.,  118  Iowa,  729. 

''Wlien  the  defalcations  of  a  cashier  exceed  the  amoimt 
of  his  bond,  the  bank  need  not  credit  on  the  bond  sums  col- 
lected from  other  sources,  but  may  apply  them  in  reduction 
of  the  unsecured  balance." 

Phillips  vs.  Bossard,  35  Fed.  99. 


2. — For  claim  against  another 
surety  company  growing  out  of 
same  transactions,  see  First  Natl. 


Bank  vs.  U.  S.  Fidelity  &  Guar- 
anty Co.,  110  Tenn.  10.  Chap.  6, 
sec.  101,  ante. 


APPLICATIOJSr    OF    SALVAGE. 


155 


114. — Discussion  of  Manner  of  Application.  3 

While  there  are  no  adjudicated  cases  upon  the  point,  it 
not  infrequently  happens  in  practice  that  tlie  surety,  especi- 
ally corporate  surety,  before  settlement  with  its  obligee,  ob- 
tains from  the  employee  or  others  in  bis  behalf  partial  re- 
covery of  the  loss.  How,  under  such  circumstances,  shall 
such  recovery  be  applied  ?  If  the  employer's  loss  is  fully 
covered  by  the  bond,  as  between  him  and  the  surety,  there 
would  seem  to  be  no  doubt  that  the  surety  would  have  the 
right  to  appropriate  the  entire  recovery  made  by  bim  in  re- 
duction of  his  own  loss ;  so,  on  the  other  hand,  where  tbe  em- 
ployer's loss  is  gi'eater  than  his  bond,  and  where  the  recov- 
ered funds,  security  or  property,  as  the  case  may  be,  or  a 
part  thereof  are  identical  funds  or  other  property  misappro- 
priated from  the  employer,  or  traceable  thereinto  it  would 
seem  to  be  equally  clear  that,  as  between  the  employer  and 
the  surety,  the  former  would  have  the  right  to  have  applied 
to  his  individual  loss  such  proportion  of  the  recovery  as  he 
could  show  consisted  of  his  property.  In  such  case  where  the 
employer  is  permitted  to  share  in  the  recovery  made  by  the 
surety,  the  principles  of  justice  and  equity  demand  that  he 
contribute  in  like  proportion  to  the  expense  of  the  recovery. 
Where  the  loss  exceeds  the  security,  and  recovery  is  made 
solely  by  the  surety  of  untraceable  property,  for  example, 
cash,  his  actual  possession  of  the  fund,  coupled  with  the  pre- 
sumption that  the  law  aids  the  vigilant,  would  certainly 
render  his  position  stronger  than  that  of  the  employer,  upon 
whom  the  burden  of  proof  rests,  to  establish  in  a  suit  against 
the  surety  his  right  to  recover  the  penalty  of  the  bond  and  to 
participate  in  the  recovery  so  made  by  the  surety.  It  will 
be  readily  perceived  that  these  question  may  become  most 


3. — The  surety,  on  payment,  has 
all  the  rights  of  employer,  even 
the    right    to    prosecute    the    de- 


faulting employee.  London  Guar- 
anty &  A.  Co.  vs.  Geddes,  22  Fed. 
639. 


ir>()  TJIK    LAW    OK    I'IDKI.rrv    BONUS. 

itiipoi-iaiit  ones  ill  instances  of  large  inisa|)j)ro{)riation.s  by 
l»anl\  (nnployee's  where  large  sums  in  cash  are  recovered 
through  the  efforts  of  the  surety,  oi-  the  joint  efforts  of  the 
hank  and  the  surety,  Jn  the  absence  of  authority  recourse 
will  doubtless  be  had  by  the  Courts  to  the  general  law  of 
salvage  in  insurance.  In  conclusion  it  may  be  said  that  there 
is  perhaps  no  instance  in  the  law  where  possession  comes  so 
near  being  the  traditional  ''nine  ]ioints  of  law"  as  this.  Thus 
reference  has  just  been  made  to  the  application  of  cash  re- 
covered by  the  surety.  Suppose  for  illustration,  the  cash  is 
recovered  by  the  employer.  It  is  apprehended  there  can  be  no 
doubt  that  he  would  have  the  right  to  apply  to  the  loss  in 
excess  of  the  bond  such  recovery  or  the  necessary  proportion 
thereof  to  extinguish  the  same. 


APPLICATION   OF   PAYMENTS.  157 


CHAPTER  XL 

APPLICATION    OF    PAYMENTS. 


115.     In  course  of  business. 
IIG.     Digest  of  autliorities. 


117.     Same. 


115. — In  Course  of  Business. 

In  the  preceding  chapter  reference  has  been  made  to  the 
recovery  from  or  restitution  by  the  employee  or  from  or  by 
others  on  his  behalf.  Reference  is  here  made  to  the  question 
of  application  by  the  employer  of  payments  of  funds  re- 
ceived for  his  ow^n  account  in  the  usual  course  of  business,  as 
well  as  the  application  by  the  employee  of  funds  coming  into 
his  hands  in  virtue  of  his  position.  For  the  question  as  to 
application  of  payments  between  different  terms  of  office, 
see  Chapter  16,  I'enn  of  Office.  Other  than  those  referring 
particularly  to  the  application  of  payments  as  between  differ- 
ent terms  of  office,  the  cases  on  the  general  subject  are  here 
collected : 

1 1 6. — Digest  of  Authorities. 

A  voluntary  conveyance  of  property  to  a  building  and 
loan  association  by  its  secretary  who  had  misappropriated 
its  funds,  with  "the  request  that  it  be  applied  to  the  first 
items  of  indebtedness,  is  not  a  settlement  relieving  a  surety 
company  from  liability  on  its  bond. 

Perpetual  B.  &  L.  Assn.  vs.  U.  S.  Fidelity  &  Guar. 
Co.,  118  Iowa,  729. 

1. — See  Chapter  10,  Application 
of  Salvage. 


ir)8  TiiK  LAW  OF  iii)i;i.rrY  ijonds. 

An  insurance  agent,  by  requirement  of  the  company  for 
which  he  was  acting,  gave  a  bond  for  the  faithful  i)erform- 
ance  of  his  duties,  and  an  a(-counting  of  moneys  received. 
At  the  time  of  giving  such  bond  he  was  delinquent  to  said 
company  on  account  of  past  transactions.  Such  agent  aft- 
erwards made  remittances  to  the  company,  directing  that 
they  be  api)liod  upon  i)ast  transactions.  A  judgment  at 
law  having  been  recovered  against  sureties  on  the  bond,  a 
bill  w;i3  filed  by  them  to  restrain  its  enforcement,  claiming 
that  the  remittances  made  were  from  current  business,  after 
the  bond  was  given,  and  should  be  applied  upon  such  ac- 
count. 

Held,  that  to  entitle  complainants  to  the  relief  prayed,  it 
must  appear  that  the  moneys  remitted  were  in  fact  from 
current  business,  and  that  the  company  had  knowledge  of 
that  fact  when  it  received  and  applied  the  money  on  account 
of  former  transactions,  as  directed,  and  proof  not  sufficient- 
ly showing  this,  the  bill  should  be  dismissed. 

Hecox  vs.  Citizens'  Ins.  Co.,  2  Fed.  535. 

If  the  employee  insured  turned  over  to  the  complainant 
all  sums  collected  by  him  after  the  execution  of  the  bond, 
the  surety  could  not  be  held  for  his  default,  notwithstand- 
ing he  may  have  credited  said  sums  on  the  wrong  accounts 
in  order  to  cover  up  previous  defaults. 

Model  Mill  Co.  vs.  Fidelity  &  Deposit  Co.,  1  Tenn. 
Ch.  App.  365. 

If  a  treasurer  of  a  corporation  has  appropriated  to  his 
own  use  sums  of  money  received  from  a  certain  source  dur- 
ing the  time  covered  by  his  official  bond,  and  other  sums 
received  from  the  same  source  after  the  bond  has  expired, 
and  he  afterwards  entered  upon  the  books  a  sum  as  received 
from  that  source,  and  such  sum  Avas  not  in  fact  received 
at  the  date  of  the  entry,  and  there  is  nothing  to  show  when 
the  same,  or  the  items  of  which  it  was  composed,  should 


APPLICATION   OF   PAYMENTS.  159 

liave  been  entered,  it  is  proper,  in  an  action  upon  the  bond, 
to  apply  one-half  of  it  to  the  time  covered  by  the  bond. 

Lexington  &  W.  C.  R.  R.  Co.  vs.  Elwell,  90  Mass. 
371. 

Where  a  creditor  receives  property  from  a  debtor  for  the 
payment  of  a  debt  for  which  security  has  been  given^  it  is 
the  dury  of  the  creditor  to  hold  the  same  impartially  for  the 
joint  benefit  of  himself  and  surety.  Where  the  creditor  in- 
tends to  look  to  the  surety  for  payment,  he  is  compelled  to 
preserve  unimpaired  all  his  rights  against  the  debtor. 

The  right  of  subrogation  to  the  rights  of  the  creditor  is 
an  essential  part  of  the  contract  of  suretyship.  Even  where 
the  act  of  the  creditor  operates  to  the  benefit  of  the  surety, 
the  latter  has  the  right  to  stand  on  the  strict  terms  of  his 
contract.  The  creditor's  first  and  highest  duty  is  to  the 
surety ;  and  he  has  no  right  to  first  exhaust  the  debtor's  re- 
sources and  reduce  him  to  a  state  of  bankruptcy,  and  then 
call  upon  the  surety  to  pay  the  balance  that  remains  due. 
J^ew  England  Mutl.  Life  Ins.  Co.  vs.  Randall,  42 
La.  Ann.  260. 

117. — Same. 

Obligations  of  an  association,  which  should  have  been 
paid  by  the  treasurer  during  his  former  term,  were  carried 
forward  by  him  into  his  new  term  and  paid  out  of  current 
receipts.  Held,  that,  as  such  obligations  were  not  dis- 
charged when  assessments  were  made  sufficient  to  meet 
them,  but  continued  obligations  until  paid,  their  payment 
out  of  funds  of  the  association  did  not  amount  to  embezzle- 
ment or  larceny  committed  during  the  new  term,  and  the 
surety  was  not  liable  for  the  misappropriation. 

Supreme  Council  C.  K.  of  A.  vs.  Fidelity  &  Cas. 
Co.,  63  Fed.  48. 

Defendant,  a  surety  company,  executed  to  plaintiff  a  bond 
by  which  it  agreed  to  make  good  such  pecuniary  loss  as 


IGO  iiiK  LAW  oi-'  111)1.1. 11  ^•  i{<>.\j>s. 

plniiil  ill's  iiiii;lit  siistuiu  during  a  cfrtaiii  pc'i-i(j(i  by  reason 
of  any  fraiuluJcnt  or  dishonest  act  of  plaintiff's  agent  in 
conned iiMi  with  his  duties,  amounting  to  embezzlement  or 
larceny.  The  agent  paid  over  to  plaintiff  all  the  money  col- 
lected during  the  period  covered  by  the  bond,  but  he  directed 
a  part  of  the  same  to  be  credited  on  other  accounts  OAving 
to  the  plaintiff  without  knowledge  by  the  plaintiff  that  the 
money  collected  by  the  agent  from  certain  accounts  was  so 
apj)lied  to  the  payment  of  other  accounts  for  which  the 
agent  was  also  liable.  Held,  that  this  action  amounted  to  a 
fraudulent  conversion  by  the  agent  of  the  money  collected, 
and  that  the  defendant  is  liable  therefor  under  the  bond. 

American  Bonding  (&:   T.   Co.  vs.   Milwaukee   Har- 
vester Co.,  91  Md.  733. 

A  corporation  employer,  in  the  absence  of  direct  instruc- 
tions from  its  bonded  secretary,  cannot  apply  moneys  col- 
lected subsequently  to  the  execution  of  a  second  bond  to  the 
discharge  of  a  liability  arising  under  the  first  bond,  so  as  to 
render  the  sureties  upon  the  second  bond  liable  for  a  delin- 
quency, and  in  such  case  the  law  will  not  apply  the  pay- 
ments 10  the  oldest  debt. 

Anaheim  Water  Co.  vs.  Parker,  101  Calif.  483. 

In  ;in  action  upon  the  security  bond  of  an  insurance 
agent  conditioned  that  he  should  pay  over  to  the  company 
all  moneys  collected  b\  him  for  the  company,  where  it  ap- 
pears that  the  agent  did  remit  to  the  company  all  the 
money  collected  during  the  term  of  the  bond,  the  fact  that 
the  agent  had  formerly  done  business  for  the  company  and 
at  the  time  of  the  execution  of  the  bond  owed  the  company 
a  balance,  and  that  the  company  without  any  direction  to 
that  effect  from  the  agent  applied  part  of  the  money  re- 
ceived from  the  agent  during  the  term  of  the  bond  to  the 
paymcii*^  of  the  back  indebtedness,  leaving  an  apparent  defi- 


APPLICATION   OF   PAYMENTS.  161 

ciency  during  the  term  of  the  bond,  would  not  make  the 
sureties  liable. 

Rockford  Ins.  Co.  vs.  Rogers,  15  Col.  App.  23. 


If  an  agent  who  gave  to  an  insurance  company  a  fidelity 
bond  faithfully  paid  over  to  the  company  all  the  money  to 
it  on  account  of  business  done  by  him  after  the  date  of  the 
bond,  the  conditions  of  the  bond  were  fully  performed,  and 
it  was  not  in  the  power  of  the  company  or  agent,  or  both 
acting  together,  to  make  any  application  of  the  money 
that  would  create  a  liability  against  the  sureties  on  the 
bond. 

Thompson  vs.  Coml.  Union  Assur.  Co.,  20  Col.  App. 
331. 

A  principal  in  a  fidelity  bond  has  a  legal  right  to  direct 
the  application  of  money  remitted  by  him  to  his  employer 
to  such  debts  as  he  pleases,  and  the  surety  cannot  object  to 
such  application,  except  where  a  diversion  of  funds  is  at- 
tempted in  fraud  of  the  rights  of  the  surety,  which  the 
surety  has  a  right  to  have  applied  in  a  particular  manner. 
Boyd  vs.  Agricultural  Ins.  Co.,  20  Col.  App.  28. 

Payments  on  an  account,  in  the  absence  of  an  agreement 
or  direction  to  the  contrary,  will  be  applied  to  the  satisfac- 
tion of  those  items  of  charge  which  are  earliest  in  point  of 
time. 

Ida  Co.  Savings  Bank  vs.  Seidenstricker,  128  Iowa, 
54. 

For  discussion  as  to  application  of  payments  where  suc- 
cessive bonds  are  involved,  and  a  review  of  authorities  see — 

First  Nat.  Bank  of  Nashville  vs.  Nat.   Surety 
Co.,  130  Fed.  401.^ 

2.— See  Chap.  11,  Sec.  113,  ante. 
11 


i(;2 


rill';    I, AW    OK    !•  IDKI.I  TV    nONDS. 


CHAPTER  XII. 


IMMEDIATE    NOTICE. 


118. 


119. 
120. 
121. 


What  constitutes  immediate 
notice  —  Supreme  Court 
rule. 

Keasonable  notice  sutficieiit. 

Digest  of  autliorities. 

Same. 


122.  Same. 

123.  Notice   under   accident   pol- 

icy. 

124.  Requirement  of  notice  rea- 

sonable and  imperative. 


ii8. — What  Constitutes  Immediate  Notice— Supreme  Court  Rule. 

"It  IS  customary  to  provide  in  all  policies  of  guaranty 
insurance  that  notice  of  loss  shall  be  given  to  the  insurer 
by  the  insured  within  a  certain  designated  time.  The  time 
here  referred  to  is  usually  controlled  by  the  use  of  such 
phrases  as  'immediate  notice,'  'notice  forthwith/  'as  soon 
as  possible/  'as  soon  as  practicable,'  etc.  These  phrases 
have  practically  one  and  the  same  meaning,  to  wit,  that 
the  insured  shall,  with  all  promptitude,  considering  the 
probable  amount  of  the  loss,  and  the  probability  of  the 
'risk's'  endeavoring  to  escape,  give  notice  to  the  insurer  of 
the  occurrence  of  the  loss." 

Frost,  on  Guaranty  Ins.,  sec.  lO-i,  316. 


The  Supreme  Court  of  the  United  States  entered  upon  a 
full  discussion  of  what  constitutes  immediate  notice  under  a 
corporate  fidelity  bond  in  the  case  of  Fidelity  &  Deposit  Co. 
vs.  Courtney,  186  IT.  S.  342,  and  upon  a  review  of  the  author- 
ities, held  that  notice  given  as  soon  as  reasonably  practicable 
under  the  circumstances  of  the  case,  or  without  unnecessary 
delay  to  be  sufficient. 


IMMEDIATE    NOTICE.  163 

In  that  case  the  Court  quoted  with  approval  the  then 
recent  decision  of  the  appellate  Court  of  New  Hampshire 
(Ward  vs.  Maryland  Cas.  Co.,  51  Atl.  Eep.  900),  in  which 
the  latter  Court  held  the  expression  "immediate  notice"  to 
mean  ''a  notice  given  with  due  diligence  under  the  circum- 
stances of  the  case,  and  without  unnecessary  and  unreason- 
able delay."  The  word  "immediate,"  when  relating  to  time 
is  defined  in  the  Century  Dictionary  as  follows :  "Without 
any  time  intervening;  without  any  delay;  present;  instant; 
often  used  like  similar  absolute  expressions,  with  less  strict- 
ness than  the  literal  meaning  requires — as  an  immediate 
answer."  The  New  Hampshire  Court,  quoting  this  defini- 
tion, says : 

"It  is  evident  that  the  word  was  not  used  in  this  con- 
tract in  its  literal  sense.  It  would  generally  be  impossible 
to  give  notice  in  writing  of  a  fact  the  instant  it  occurred. 
It  cannot  be  presumed  that  the  parties  intended  to  intro- 
duce into  the  contract  a  provision  that  would  render  the 
contract  nugatory.  As  'immediate'  was  understood  by  them, 
it  alloAved  the  intervention  of  a  period  of  time  between  the 
occurence  of  the  fact  and  the  giving  of  notice  more  or  less 
lengthv  according  to  the  circumstances." 

119. — Reasonable   Notice   Sufficient. 

Contracts  of  fidelity  insurance  are  and  should  be  construed 
as  contracts  of  indemnity,  without  strained  niceties  of  lan- 
guage or  technicalities,  and  be  dealt  with  as  practical  pru- 
dent men  in  a  busy  commercial  world  would  deal  with  them. 
Insurance  companies  will  not  be  permitted  to  incorporate  in 
their  contracts  provisions  impossible  of  performance,  or  such 
as  would  render  them  nugatory.  Broadly  speaking,  there- 
fore, "immediate  notice"  in  such  contracts  means  reasonable 
notice,  or  better,  seasonable  notice.  What  is  reasonable  notice 
in  a  given  case  must  be  determined  by  the  facts  of  that  case, 
measured  by  the  authorities.     Manifestly  what  is  reasonable 


1(14  llll';    1,A\V    ()!•'    1- IDKLIIY    BONDS. 

uuticT  umlcr  one  set  of  circunisUiuces  would  not  be  under 
another,  and  in  this  connection  it  must  l)e  borne  in  mind 
that  the  infonnation  wliich  comes  to  an  (•m])loyer  of  the  de- 
linquency of  his  em^doyee  is  fi-equently  of  an  uncertain 
nature,  and  such  aa  would  not  justify  a  prudent  man  in 
charging  another  with  the  grave  offense  of  dishonesty.  Be- 
fore an  employer  is  bound  to  act,  he  must  have  "'knowledge" 
of  the  acts  charged,  not  mere  suspicions.  So  that,  looking  at 
the  situation  of  the  parties,  the  distances  involved,  the  char- 
acter of  the  information  obtained  by  the  employer,  the  acts 
of  the  employee,  the  method  and  character  of  the  business, 
the  relative  amounts  involved,  the  possibility  of  loss  or  dam- 
age to  the  surety  by  delay  and  all  such  matters,  the  timeli- 
ness of  the  notice  must  be  judged. 

1 20. — Digest  of  Authorities. 

Illustration  of  the  matter  under  discussion  will  be  found 
in  the  following  cases : 

Under  a  corporate  fidelity  bond  requiring  ''immediate" 
notice  of  a  default,  the  question  was  properly  submitted  to 
a  jury,  as  it  cannot  be  said  as  a  matter  of  law  that  a  delay 
of  six  or  eight  days  is  a  violation  of  such  requirement. 

Perpetual  B.  &  L.  Assn.  vs,  U.  S.  Fidelity  cS:  Guar- 
anty Co.,  118  Iowa,  729. 

Where  an  employer  holding  a  corporate  fidelity  bond 
guaranreeiug  against  loss  by  acts  of  dishonesty  amounting  to 
embezzlement  or  larceny,  on  the  part  of  his  bookkeeper  and 
cashier,  employed  an  expert  accountant  to  examine  his 
books  and  improve  his  system  of  accounts,  and  where  such 
expert  began  his  examination  on  April  22,  190-1,  and  soon 
discovered  a  discrepancy  of  several  hundred  dollars,  of 
which  a  plausible  explanation  was  given  by  the  employee, 
and  wlicre  the  employee  handled  from  $50,000  to  $80,000 
]ier  month,  and  where  the  accoimts  Avere  complicated  and 


IMMEDIATE    NOTICE.  165 

found  to  be  falsified,  and  where  the  expert  continued  his 
investigation  from  the  22nd  of  April  until  the  24th  of 
June  following,  at  which  time  notice  of  the  amount  of  an 
alleged  defalcation  was  given  the  surety,  a  preliminary  no- 
tice of  a  probable  default  having  first  been  given  on  May 
28th,  held,  the  notices  given  were  a  sufficient  compliance 
with  the  provisions  of  the  bond  requiring  ''immediate  no- 
tice" after  notice  of  such  dishonest  acts  shall  have  come  to 
the  knowledge  of  the  employer. 

Aetna  Ind.  Co.  vs.  J.  R.  Crowe  Coal  &  Mining  Co., 
154  Fed.  545. 

Under  an  employer's  indemnity  bond,  providing  that  the 
employer  shall,  on  the  discovery  of  any  fraudulent  act  on 
the  part  of  the  employee,  immediately  give  notice  thereof  to 
the  company,  unless  the  lapse  of  time  was  so  long  as  to  be 
obviously  a  non-compliance  with  the  contract,  the  question 
whether  the  notice  was  timely  is  one  for  the  jury. 

And  where  a  bank  first  obtained  information  on  April 
7th  that  aroused  its  suspicions  concerning  an  employee's 
fidelity,  and  proceeded  to  verify  the  first  item,  which  took 
till  April  10th,  or  11th,  and  a  tentative  arrangement  was 
made  with  his  family,  and  the  examination  progressed  and 
notice  was  given  his  surety  on  April  20th,  it  was  not  con- 
tended that  such  notice  did  not  fulfill  the  requirements  of 
the  bond. 

Fidelity  &  Guaranty  Co.  of  IST.  Y.  vs.  Western  Bank, 
29  Ky.  L.  R.  639. 

Under  an  indemnity  bond  insuring  a  corporation  against 
larceny  or  embezzlement  by  an  employee  and  stipulating 
that  the  insurer  shall  be  given  written  notice  immediately 
after  the  occurrence  of  an  act  indemnified  against  shall 
come  to  the  employer's  knowledge,  where  the  secretary  and 
director  of  the  corporation  had  knowledge  on  ISTovember 
19th  of  an  embezzlement  by  an  employee,  and  did  not  notify 
the  insurer  until  December  7th,  such  knowledge  of  the  sec- 


166 


TJIK    J.AW    OF    I-IDI/.LITV    llONDS. 


retary  was  ihr  knowledge  of  the  coi-jjoration^  and  his  neg- 
lect "was  a  failure  to  perform  a  condition  precedent  to  a 
recovery  on  the  bond.  It  was  not  necessary  for  the  defend- 
ant to  show  that  earlier  notice  might  have  helped  towards 
the  recovery  of  some  of  the  loss,  or  affected  its  election  as  to 
canceling  the  bond,  or  aided  in  bringing  the  offending  em- 
ployee to  justice. 

National  Discount  Co.  vs.  United  States  Fidelity  & 
Guaranty  Co.,  94  N.  Y.  Supp.  457. 

Where  the  plaintiff  in  an  action  on  a  surety  bond,  Avithin 
a  reasojiable  time  and  with  due  diligence,  under  the  circum- 
stances, gives  notice  of  the  default  of  its  cashier,  it  is  a 
sufficient  compliance  with  the  requirement  of  immediate 
notice. 

Bank  of  Tarboro  vs.  Fidelity  &  Deposit   Co.,   128 
N".  C.  366. 

A  bank  cashier  was  given  a  leave  of  absence  on  August 
17,  1901,  which  expired  on  August  22.  His  failure  to  re- 
turn did  not  arouse  suspicion  until  August  26,  when  an  ex- 
amination of  his  books  was  made  which  disclosed  his  defal- 
cation. His  sureties  were  then  telegraphed,  either  on  the 
26th  or  27th,  whereupon  each  sent  a  representative,  who 
participated  in  the  examination  of  the  books  during  the 
latter  part  of  August,  and  on  September  2nd  a  formal  noti- 
fication of  the  cashier's  flight  and  defalcation  was  sent  to 
defendant  surety  company. 

Held,  that  whether  the  defendant  Avas  given  "immediate" 
notice  of  the  defalcation,  as  required  by  the  fidelity  bond, 
was  for  the  jury. 

Fidelity  &  Casualty  Co.  vs.  Bank  of  Timmonsville. 
139  Fed.  101.1 


1. — For  another  case  involvinsr 
the  disappearance  of  a  specific 
sum  of  money,  see  T'.  S.  Fidelity 


&  Huaranty  Co.  vs.  Des  Moines 
Nat.  Bank.  14.5  Fed.  273.  Chap.  8. 
see.  100.  ante. 


IMMEDIATE    NOTICE.  167 

121. — Same. 

"Immediately"  means  before  the  happening  of  other 
events — forthwith.  A  covenant  to  notify  a  surety  of  the 
default  of  his  principal  immediately  is  not  performed  by 
mailing  a  notice  11  days  after  the  known  default. 

liS"ational  Surety  Co.  vs.  Long,  125  Fed.  887. 

(This  case  refers  to  a  bond  guaranteeing  the  perfoiTnance 
of  a  building  contract  where  immediate  notice  and  opportu- 
nity to  the  surety  are  vital  to  the  protection  of  his  interests, 
hence  the  strictness  of  the  rule  here  applied.  In  the  same 
controversy  the  Supreme  Court  of  Arkansas  held  that  a  delay 
of  twelve  days  in  notifying  the  surety  did  not  discharge  the 
latter— 79  Ark.  523.) 

The  delay  of  over  one  month  in  notifying  the  surety  in  a 
fidelity  bond  of  employee  will  release  the  surety  therein. 

Martin  &  Co.  vs.  United  States  Fidelity  &  Guar- 
anty Co.,  Jefferson  Circuit  Court,  Chancery 
Branch,  First  Div.  (Ky.  1904). 

Whether  or  not  the  delay  of  employer  of  forty-five  days 
in  giving  a  guaranty  company  notice  of  the  discovery  of  the 
dishonesty  of  a  clerk  whom  a  company  had  guaranteed  was 
unreasonable  is  a  question  for  the  jury,  under  a  bond  condi- 
tioned that  the  company  should  have  immediate  notice, 
since  immediate  notice  ordinarily  means  within  a  reason- 
able time,  and  the  question  of  reasonableness  of  time  de- 
pends upon  the  circumstances  of  the  particular  case. 

Remington  vs.  Fidelity  &  Deposit  Co.,  27  Wash.  429. 

Under  a  bond  of  an  agent  of  a  trust  company,  requiring 
immediate  notice  of  the  agent's  misconduct,  the  obligee's 
knowledge  of  such  misconduct  for  six  months  without  giv- 
ing notice  released  the  obligor. 

Michigan  Savings  &  L.  Assn.  vs.  M.,  K.  (S:  T.  Trust 
Co.,  73  Mo.  App.  161. 


KiM  IIIK    ].A\V    OK    lIUKIjrV     |{i)M)S. 

Wlurc  ;i  corporato  fidclitv  l)iiii(l  licM  \>y  a  liaiik  j>rovi(J('d 
tlijil  "iiiiiiicilinic  iioticr"  slmiild  lie  yncii  the  surety  of  any 
(lolault,  and  tlic  hank  was  (dosed  \>y  the  ( 'oiiiptroller  of  the 
Currency  on  -lanuarv  ISth,  and  a  receiver  appoijited  four 
days  afterwards,  and  expert-;  lir'i:;an  :in  examination  of  the 
books  of  the  bank,  and  two  or  three  weeks  after  the  sus- 
pension of  tlie  bank  discovered  certain  defaults,  notice  of 
which  was  given  the  surety  on  February  18th,  the  trial 
Court  properly  left  to  the  jury  to  determine  Avhether  such 
notice  was  a  sufficient  (•f):n])liaiice  with  the  aforesaid  provi- 
sion of  the  bond. 

The  issue  having  been  found  in  favor  of  the  plaintiff,  the 
finding  will  not  be  disturbed  by  the  Appellate  Court. 

Fidelity  &  Deposit  Co.  vs.  Courtney,  186  U.  S.  342. 

122. — Same. 

When  a  fidelity  bond  required  notice  to  be  given  of  dis- 
honesty of  employee,  and  wIkmt  employee  collected  in  Au- 
gust money  wdiich  should  have  been  reported  and  remitted 
September  2nd,  but  employee  failed  to  do  either,  and  where 
employer  Avrote  and  telegraphed  employee  and  sent  a  repre- 
sentative to  see  him,  who  promised  to  get  the  money,  and 
thereafter  sent  a  check  which  was  protested  for  non-pay- 
ment, and  employer  gave  no  notice  of  default  to  surety  till 
October  7th,  held,  employer  was  delinquent  in  giving  notice 
and  could  not  recover. 

Supreme  Kiding  of  Fraternal  Mystic  Circle  vs.  Xa- 

tional  Surety  Co.,  00  X.  Y.   Sui)p.   1033;   114 

App.  Div.  689. 

Under  the  conditions  of  a  surety  bond,  the  employer  un- 
dertook to  notify  the  insurer  of  any  act  of  omission  or  com- 
mission on  the  part  of  the  employee  which  may  involve  a 
loss  for  which  the  insurer  is  responsible,  immediately  after 
the  occurrence  of  such  act  comes  to  the  knowdedge  of  the 
employer.  The  employer  learned  that  the  employee  had 
been  drunk,  bad  lost  or  been  robbed  of  monev,  etc.     Held, 


IMMEDIATE    NOTICE.  169 

the  employer  was  not  required  to  give  notice  of  such  con- 
duct of  the  employee,  since  the  duty  to  notify  was  intended 
to  relate  only  to  the  acts  of  the  employee  affecting  the  ques- 
tion of  his  integrity  and  the  scope  of  his  duty  could  not  be 
extended. 

Long  Brothers'  Grocery  Co.  vs.  United  States  Fidel- 
ity &  Guaranty  Co.,  130  Mo.  App.  421. 

Where  the  bond  of  an  insurance  agent  required  monthly 
remittances  of  money  collected,  and  the  agent  was  permitted 
to  be  in  default  several  months  without  notice  to  the  surety, 
the  latter  is  not  discharged  where  such  delinquency  is  not 
attributable  to  moral  turpitude  and  dishonesty. 
Gilbert  vs.  State  Ins.  Co.,  3  Kas.  App.  1. 

In  a  bond  guaranteeing  against  loss  by  the  fraud  or  dis- 
honesty of  an  employee,  a  provision  that  the  employer  is  to 
notify  the  surety  "of  any  act  of  omission  or  commission  on 
the  part  of  the  employee  which  might  involve  a  loss,  for 
which  the  company  is  responsible  hereunder,"  does  not  ren- 
der it  necessary  that  the  employer  is  to  notify  the  company 
of  every  act  of  laches  or  delay  or  inefficiency  on  the  part  of 
the  employee  which  ultimately  may  create  a  loss  to  the  em- 
ployer ;  but  only  that  the  company  be  notified  of  acts  which 
may  create  a  loss  for  which  it  is  responsible — that  is,  a 
loss  arising  from  fraud  or  dishonesty.  Mere  laches  or  in- 
efficiency which  is  consistent  with  integrity  is  not  required 
to  be  communicated. 

Pacific   Fire   Ins.    Co.   vs.    Pacific   Surety   Co.,   93 
Calif.  7. 

123. — Notice  Under  Accident  Policies. 

In  accident  policies,  notice  twenty-six  days  after  the  acci- 
dent is  not  compliance  with  provision  requiring  "immediate 
notice."  Smith  vs.  Ins.  Co.,  171  Mass.  357;  nor  is 
notice  in  twenty-five  days,  Foster  vs.  Fidelity  &  Cas.  Co.,  75 


170  TJIE   LAW    OF   IIDKLITV    BONDS. 

A'.  \V.  (W'iis.j  G'J  ;  nur  six  Jays,  liailway  I'aaseiiger  Assur. 
Co.  vs.  Burwell,  44  Ind.  460;  nor  ninety-one  days,  London 
Accident  Co.  vs.  Siwy,  35  Ind.  App.  340;  nor  fifteen  days, 
Aetna  Life  Ins.  Co.  vs.  Fitzgerald,  165  Ind.  317 ;  but  where 
death  oceurred  ninety  days  after  accident  and  immediate 
notice  after  death,  held  sufficient  on  demurrer,  Fidelity  & 
Cas.  Co.  vs.  Brown,  4  Ind.  Ter.  397;  convenient  time  as 
reasonably  requisite,  sufficient.  Kentzler  vs.  Amer.  Mut'l 
Ace.  Ass'n,  88  Wis.  581) ;  reasonable  time,  Ilorsfall  vs.  Pac. 
Mut'l  Life  Ins.  Co.,  32  Wash.  132 ;  Lockwood  vs.  Middlesex 
Ins.  Co.,  47  Conn.  566 ;  failure  to  give  notice  for  six  days 
not  sufficient  under  fire  policy,  Ermentrout  vs.  Girard  F.  & 
M.  Ins.  Co.,  63  Minn.  305 ;  twenty  days  not  sufficient  under 
requirement  for  notice  "forthwith."  Whitehurst  vs.  ISTorth 
Carolina  Ins.  Co.,  7  Jones  L.  (jST.  C.)  433;  but  immediate 
notice  to  local  agent  is,  Fisher  vs.  Crescent  Ins.  Co.,  33  Fed. 
544. 

124. — Requirement  of  Notice  Reasonable  and  Imperative. 

Mr.  Ostrander  in  his  work  on  Insurance,  Sec.  221  says: 
"If  the  insured  neglects  to  comply  with  the  provision  in 
an  insurance  policy  requiring  immediate  notice,  he  does 
so  at  his  peril.  The  requirement  is  as  reasonable  as  it  is 
imperative,  and  has  been  enforced  with  great  strictness  by 
the  Courts." 


riiooF  OF  j.oss,  1 7 1 


CHAPTER  XIIL 

PROOF    OF   LOSS. 


125.  Sufficiency  of. 

126.  Digest  of  authorities. 


127.     Same. 


125. — SufBciency  of. 

With  reference  to  proof  of  loss  under  a  corporate  fidelity 
bond,  it  was  held  in  the  Pauly  Case,  170  U.  S.  160,^  as  fol- 
lows: 

"A  provision  in  a  fidelity  insurance  bond  that  a  written 
statement  of  loss,  certified  by  the  duly  authorized  officer  of 
the  employer,  and  based  upon  the  accounts  of  the  employer, 
'shall  be  prima  facie  evidence  thereof,'  makes  such  a  state- 
ment prima  facie  proof  in  an  action  brought  on  the  bond, 
and  does  not  relate  merely  to  the  presentation  of  the  claim 
to  the  company,  and  its  acceptance  or  rejection  thereof, 
before  suit." 

There  was,  however,  a  strong  dissenting  opinion,  by  three 
Justices,  and  the  rule  as  here  laid  down  does  not  appear  to 
have  been  followed  in  the  later  cases. 

126. — Digest  of  Authorities. 

The  requirement  in  a  corporate  fidelity  bond  that  the 
employer  shall  file  with  the  company  his  or  her  claim,  with 
full  particulars  thereof,  as  soon  as  practicable,  contemplates 
not  a  partial  but  a  full  statement  of  all  the  items  of  claimed 
misappropriations. 

Fidelity  &  Deposit  Co.  vs.  Courtney,  186  IJ.  S.  342. 

1. — See  Chapter  1,  sec.  10,  note. 


Till-;    I. AW    ()|-    I  IDI'l.nv     ItoNDS. 

I'lic  contract  stipulated  t'ni-  [(roof  of  loss  satisfactory  to 
the  company's  offioors,  ami  I  lint  full  ])articiilars  of  any  claim 
arisinsj^  U|hiii  the  conti'iict  should  bo  given  in  writing  within 
a  specified  time;  and  the  declaration  alleging  compliance 
^\illl  the  loregoing  terms  of  the  contract,  but  not  alleging 
that  there  had  been  any  waiver  of  the  requisite  proof  of 
loss;  and  tlie  evidence  entirely  failing  to  show  that  the 
same  had  bene  duly  furnished,  the  plaintiff  did  not  prove 
its  case  as  laid,  and  it  was  error  to  refuse  a  non-suit.  This 
is  true,  although  the  plaintiff  introduced  evidence  for  the 
purpose  of  proving  a  waiver  by  the  defendant  of  such  proof 
of  loss;  and  it  is  immaterial  whether  this  evidence  was,  or 
was  not,  legally  sufficient  to  establish  the  alleged  Avaiver. 

Fidelity  &  Casualty  Co.  vs.  Gate  City  Nat.  Bank,  97 
Ga.  634. 

A  statement  of  alleged  embezzlements  or  larcenies  of  an 
agent  director  delivered  to  an  indemnity  company,  to  the 
extent  that  it  reflects  information  contained  in  the  books 
and  records  of  the  em])loyer  kept  in  the  regular  and  ordi- 
nary course  of  its  business,  is  based  on  "the  accounts  of  the 
employer"  within  a  provision  of  the  indemnity  bond  mak- 
ing such  a  statement  prima  facie  evidence  of  the  loss. 

Security  Mutl.  Life  Ins.  Co.  vs.  Aetna  Ind.  Co.,  108 
K  Y.  Supp.  171. 

Absulnte  denial  of  liability  on  a  fidelity  bond  is  a  waiver 
of  the  requirement  to  furnish  proofs  of  loss;  and  the  ac- 
ceptance and  retention  of  proofs,  without  objection  until 
the  time  for  making  the  same  has  expired,  is  a  Avaiver  of  the 
right  to  question  their  sufficiency. 

Sinclair  <&:  Co.  vs.  ISTational  Surety  Co.,  132  Iowa. 

549. 
Kamsey  vs.  Pluionix  Ins.  Co.,  2  Fed.  429. 

The  contract  of  a  surety  company  required  the  employer 
to  furnish  the  company  such  reasonable  particulars   and 


PROOF    OF    LOSS. 


1Y3 


proofs  of  the  correctness  of  the  claim  as  the  company  "may 
think  fit."  Upon  a  loss,  the  company  required  of  the  em- 
ployer information  of  the  particulars  of  every  oral  state- 
ment made  in  relation  to  the  storage.  The  employer  failed 
to  give  the  company  information  of  certain  confessions 
made  by  the  principal.  These  confessions  vi^ere  offered  in 
evidence  by  the  plaintiff.  Held,  he  was  not  entitled  to  re- 
cover. 

Hough  vs.  Am.  Sur.  Co.,  90  Mo.  App.  475. 

An  employer's  letter  notifying  a  surety  company  of  a 
loss  was  forwarded  on  October  12.  The  company  continued 
the  correspondence  to  the  following  spring  with  no  claim 
of  fraud  or  offer  to  return  the  premium,  and,  when  finally 
sued,  for  the  first  time  set  up  fraud.  Held,  that  prompt- 
ness in  the  disavowal  of  the  contract  is  a  prime  condition 
to  its  repudiation  and  the  alleged  fraud  was  waived. 

Koark  vs.  City  Trust,  Safe  Deposit  &  Surety  Co., 
130  Mo.  App.  401. 

127. — Same. 

The  making  of  a  thorough  investigation  by  the  insurer 
on  his  own  account,  before  recieving  the  proofs  of  loss,  is  no 
evidence  of  a  waiver  of  the  requirements  of  a  policy  in  re- 
spect to  such  proofs. - 

People's  Bank  vs.  Aetna  Ins.  Co.,  20  C.  C.  A.  630. 

The  insurer  who  rejects  preliminary  proofs  as  defective, 
without  specifying  the  defects,  with  a  notice  that  he  insists 
on  an  exact  compliance  with  the  condition  in  the  policy, 
waives  no  rights  to  urge  the  defects  in  such  proofs. 

Gauche  vs.  London  &  L.  Ins.  Co.,  10  Fed.  347. 


2. — Compare  Sherman  vs.  Har- 
bin, 125  Iowa,  174,  Chap.  1,  sec. 
17,  ante,  and  Perpetual   B.  &  1j. 


Assn.  vs.  U.  S.  Fidelity  &  Guar- 
anty Co.,  118  Iowa.  729.  Chap.  9, 
see.  Ill,  ante. 


174  TUK    I.AW    OK    I  IDKLITV    BONDS. 

The  bond  in  the  case  at  bar  does  not  prescribe  any  time 
within  which  the  proof  of  loss  shall  be  furnished,  but  simply 
that  the  right  of  action  shall  not  accrue  until  90  days  after 
such  proof  is  furnished.  The  bond,  however,  does  expressly 
provide  ''that  the  company  shall  bo  notified  in  writing,  at  its 
office  in  the  City  of  New  York,  of  any  act  on  the  part  of 
the  employee  which  may  involve  a  loss  for  which  the  com- 
pany is  responsible  hereunder,  as  soon  as  practicable  after 
the  occurrence  of  such  act  shall  have  come  to  the  knowledge 
of  the  employer."  The  fraudulent  acts  of  the  employee 
were  discovered  by  plaintiff  not  later  than  Sept.  7th,  1892, 
and  yet  the  written  notice  of  such  acts  was  not  given  to  the 
defendant  until  December  16th,  1895.  Held,  insufficient 
compliance  with  requirements  of  the  contract. 

California  Sav.  Bank  vs.  American  Surety  Co.,  87 
Fed.  118. 


CHANGE   OF  EMPLOYMENT. 


175 


CHAPTER  XIV. 


CHANGE    OF    EMPLOYMENT    OR    ALTERATION 
OF    CONTRACT. 


128.  Effect  on  liability  of  surety 

of  uncommunicated  change 
of  employment  or  altera- 
tion of  contract  between 
principal  and  obligee. 

129.  Risk   performing    duties   ot 

more   than   one   office. 

130.  Effect    of    change    in    con- 

tract   or    duties    of  agent. 


131.  Extension     of     charter     of 

obligee  or  increase  of  cap- 
ital stock. 

132.  Change    in    partnership    of 

risk. 

133.  Change    of    partnership    of 

obligee. 

134.  Miscellaneous  cases. 


128. — Effect  on  Liability  of  Surety  of  Uncommunicated  Change  of 
Employment  or  Alteration  of  Contract  Between  Principal 
and  Obligee. 

A  change  made  in  a  contract  of  suretyship  by  the  creditor 
and  principal  without  the  assent  of  the  surety  discharges 
the  latter,  whether  the  change  is  prejudicial  to  him  or  not. 

Bank  of  St.  Albans  vs.  Smith,  30  Vt.  148. 

Stevens  vs.  Partridge,  109  111.  App.  486. 

Note  to  Griswold  vs.  Hazard,  141  U.  S.  260. 

The  sureties  on  a  bond  for  the  faithful  performance  of 
duties  of  an  agent  are  released  from  liability  for  the  subse- 
quent defaults  of  the  agent  if  the  principal  and  agent, 
without  the  knowledge  or  consent  of  the  sureties,  materially 
alter  the  terms  of  the  contract  of  agency. 

Roberts  vs.  Donovan,  70  Calif.  108. 

Germania  Fire  Ins.  Co.  vs.  Hermann,  193  Mass.  67. 


Corporate  fidelity  bond  of  bank  teller  conditioned  against 
loss  by  dishonesty  in  connection  with  his  duties  as  receiving 


170  Till':    LAW    OK    IIDKI.IIV     UoMJS. 

teller,  "or  the  (lutics  Id  uhicli,  in  the  ciiijjloyer's  service,  he 
may    be    suhscciiicntlv    nppoiiited    or    assigned    by    tlie    em- 
ployer," covers  losses  arising  fi-om  the  employee's  dishoti 
esty  while  acting  as  assistant  cashier. 

I'idclity  &  Casualty  Co.  vs.  Gate  City  Xat.  Bank, 
97  Ga.  634. 

Where  a  new  contract  made  by  an  employer  with  an  em- 
ployee increases  tlie  resj)onsibilities  of  the  employee,  such 
new  contract  discharges  a  fidelity  and  guaranty  company 
from  liability  on  its  bond. 

In  this  case  the  employee  was  designated  under  the  origi- 
nal contract  as  "assistant  superintendent  of  the  thrift  de- 
partment in  connection  with  its  Wilmington  agency."  In 
a  new  contract  subsequently  made,  of  which  the  surety  had 
no  notice,  he  was  designated  "district  manager,"  and  his 
field  of  operations  made  to  embrace  six  counties. 

Sun  Life  Ins.  Co.  vs.  United  States  Fidelity  k  Guar- 
anty Co.,  130  N.  C.  129. 

If,  after  the  giving  of  a  bond  of  suretyship  for  the  faith- 
ful performance  of  the  duties  of  a  corporate  ofhcer,  the 
duties  and  responsibilities  pertaining  to  the  office  are  mate- 
rially changed  by  the  obligee  so  as  to  affect  the  responsi- 
bility and  risk  of  the  surety,  the  bond,  as  to  him  at  least, 
is  thereby  discharged.  The  sureties  will  not,  in  general,  be 
relieved  from  responsibility,  however,  merely  because  the 
act  of  his  principal,  which  occasioned  the  loss  to  the  obli- 
gee, was  not  strictly  in  the  line  of  the  duties  of  his  office, 
or  was  done  in  the  course  of  a  temporary  or  casual  per- 
formance of  other  duties  at  the  request  of  the  employer. 

Am.  Telegraph  Co.  vs.  Lennig,  139  Pa.  St.  594. 

Garnett  vs.  Farmers'  :N"atl.  Bank,  91  Ky.  614. 

If  moneys  embezzled  by  a  princiinil  in  a  bond  of  surety- 
ship  are   received  by  him  under  his  appointment   and   in 


CHANGE   OF  EMPLOYMENT.  177 

pursuance  of  his  duties,  the  faithful  performance  of  which 
are  secured  by  the  bond,  the  mere  fact  of  the  imposition 
upon  him  of  other  and  greater  duties  and  responsibility 
in  no  way  interfering  with  or  modifying  those  imposed  by 
the  original  appointment,  will  not  discharge  the  surety. 

Harrisburg  S.  &  L.  Assn.  vs.  United  States  Fidelity 
&  Guaranty  Co.,  197  Pa.  St.  177. 

A  surety  for  the  performance  of  the  duties  of  an  agent 
is  not  discharged  by  the  subsequent  imposition  of  new  du- 
ties on  the  agent  if  such  new  duties  do  not  materially  af- 
fect the  performance  of  his  original  duties  nor  increase  the 
risks  of  the  surety. 

Powell  vs.  Fowler,  85  Ark.  451. 

Saint  vs.  Wheeler  &  Wilson  Mfg.  Co.,  95  Ala.  362. 

Shackamaxon  Bank  vs.  Yard,  150  Pa.  St.  351. 

129. — Risk  Performing  Duties  of  More  Than  One  Office. 

Where  one  was  appointed  to  one  of  two  ticket  offices  of 
a  railroad  in  a  city,  and  afterwards  the  duties  and  respon- 
sibilities of  both  offices  were  imposed  upon  him  with  in- 
creased compensation,  without  the  assent  of  his  sureties,  it 
was  held  this  was  such  a  change  as  would  discharge  them. 
Mumford  vs.  M.  &  C.  E.  K.  Co.,  2  Tenn.  393. 

But  the  change  of  a  station  from  second  to  first  class, 
whereby  the  agent  received  a  larger  amount  of  freight,  will 
not  release  his  sureties. 

Strawbridge  vs.  B.  &  O.  E.  E.,  14  Md.  360. 

iN'either  will  the  promotion  of  a  freight  clerk  to  the  office 
of  principal  agent  of  the  company  at  the  same  place. 
Collier  vs.  Southern  Express  Co.,  73  Va.  718. 

Where  a  bank  teller  is  made  cashier  the  fact  that  he 
continues  to  act  as  teller  does  not  increase  the  risk  of  the 
12 


178  TIIK    LAW    OK    IIDII-ITV    IJONDS. 

sureties   on    liis    boiu]    as   cashier,    and    will    not    discharge 
them. 

Ilibernia  Savings  Bank  vs.  McGinnis,  9  Mo.  App. 

578. 

Nor  will  they  be  discharged  by  an  answer  alleging  that 
he  had  been  permitted  by  the  bank  to  perform  the -duties 
in  an  irregular  way,  and  to  engage  in  business  outside  the 
bank,  and  to  perfoi-ni  the  duties  of  other  officers  of  the 
bank. 

Third  Xatl.  Bank  vs.  Owen,  101  Mo.  558. 

So  it  is  immaterial  that  an  embezzlement  was  committed 
by  an  assistant  bookkeeper,  while  he  was  employed  in  keep- 
ing a  journal  which,  when  he  entered  upon  his  duties,  and 
usually,  was  kept  by  the  teller,  and  that  the  fraudulent 
entries  were  made  in  such  journal. 

Rochester  City  Bank  vs.  Elwood.  26  N.  Y.  88. 

But  where  an  employer  increased  the  duties  of  his  book- 
keeper and  collector,  so  that  he  was  required  to  perform 
the  duties  of  cashier,  and  as  such  had  control  of  all  the 
cash  of  the  business,  a  surety  on  the  employee's  bond  as 
bookkeeper  and  collector,  conditioned  for  the  faithful  per- 
formance of  his  duties,  and  to  pay  over  all  moneys  received 
in  that  capacity,  was  not  liable  thereon  for  an  embezzle- 
ment, though  accomplished  by  means  of  fraudulent  entries 
by  such  employee  as  bookkeeper,  since  the  extending  of 
such  employee's  duties  was  an  increase  of  the  risk  and  dis- 
charged the  surety. 

Kellogg  vs.  Scott,  58  X.  -T.  Eq.  344. 

130.— Effect  of  Change  in  Contract  or  Duties  of  Agent. 

Where  a  sales  agent  was  bonded  for  the  faithful  per- 
formance of  duty  at  C,  in  the  State  of  K.,  and  his  employ- 
ment there  subsequently  terminated  and  he  was  removed 
to  another  State  and  subsequently  returned  to  L..  in  the 


CHANGE   OF  EMPLOYMENT.  179 

State  of  K.,  the  bond  was  not  liable  for  defaults  committed 
in  the  later  employment. 

Singer  Mfg.  Co.  vs.  Armstrong,  7  Kan.  App.  314. 

Under  a  sewing  machine  agent's  bond  guaranteeing  a 
contract,  his  sureties  are  discharged  where  his  territory  was 
enlarged. 

Plunkett  vs.  Davis  Sewing  Machine  Co.,  84  Md.  529. 

A  bond  reciting  that  the  obligor  had  been  appointed 
agent  to  an  insurance  company  bound  him  to  conform  to 
all  instructions  and  to  remit  all  moneys  which  he,  as  agent, 
should  receive.  Subsequently  he  resigned  his  agency  in 
writing  and  the  company  accepted  it  also  in  writing,  but 
he  continued  to  be  employed  by  them.  Held,  that  the  bond 
did  not  cover  any  default  after  the  time  of  his  resignation. 
Amicable  Mutl.  Ins.  Co.  vs.  Sedquick,  110  Mass.  163. 

Where  a  bond  of  an  insurance  agent  conditioned  for  his 
fidelity  in  a  certain  employment  specifically  set  out,  which 
contained  the  addition,  "during  his  employment  by  said 
company  in  whatever  capacity  in  which  he  may  be  engaged, 
the  duties  and  emoluments  of  which  may  be  changed  from 
time  to  time  by  the  company  without  notice  to  the  sure- 
ties," and  such  agent  is  afterwards  employed  in  a  wholly 
different  position,  with  increased  responsibilities,  and  un- 
der an  entirely  different  contract,  the  surety  does  not  re- 
main liable  for  default  under  such  new  contract. 

Iliff  vs.   Western   Southern  Life   Ins.    Co.,    11    Cir. 
Ct.  426  (Ohio). 

In  an  action  on  a  bond  guarantying  the  fidelity  of  an 
agent  as  special  agent  of  an  insurance  company  in  a  cer- 
tain county,  a  defense  that  after  the  execution  of  the  bond 
the  duties  of  the  agent  were  increased  by  his  appointment 
as  general  agent  of  the  company  for  the  State  was  without 


180  THK    I.AW    Oh'    MDKLITY    BUNDS. 

iiu-rit,  wJnTu  tlir  cunliac't  ol'  uppuiiiling  the  agent  general 
State  agent  was  made  prior  to  the  execution  of  the  bond 
and  the  facts  coniphiined  of  in  the  action  were  acts  as  spe- 
cial agent,  and  not  as  general  agent. 

Boyd.  vs.  Agricultural  Ins.  Co.,  20  Col.  App.  28. 

The  sureties  on  the  bond  of  a  life  insurance  agent  were 
not  exonerated  by  a  change,  not  to  the  detriment  of  the 
agent,  in  the  rate  of  commissions  allowed  on  new  business, 
when  there  was  no  stipulation  in  the  bond  or  the  original 
agreement  between  the  agent  and  the  company,  that  the 
commissions  should  remain  fixed  and  unaltered. 

Harper  vs.  Xat.  Life  Ins.  Co.,  56  Fed.  281. 

Nor  will  the  change  from  commissions  to  salary  release 
the  surety. 

Socialistic  Co.  Op.  Pub.  Assn.  vs.  Hoffman,  33  N. 
Y.  Supp.  695. 

Xor  change  in  compensation. 

Saint  vs.  Wheeler  (t  Wilson  Mfg.  Co.,  95  Ala.  362. 

131. — Extension    of    Charter    of    Obligee,    or    Increase    of    Capital 
Stock. 

Extending  the  charter  of  a  bank  without  taking  new 
surety  relieves  sureties  under  first  charter  for  defalcation 
'of  cashier  under  neAv  charter. 

Thompson  vs.  Young,  2  Ohio,  437. 

The  increase  of  the  capital  stock,  the  borrowing  of  money 
and  increase  of  the  circulation  of  a  banking  company  will 
not  discharge  the  sureties  on  the  bond  of  its  treasurer. 

Morris  Canal  «S:  Banking  Co.  a's.  Van  Yorst,  1  Zab. 

(K  J.)  100. 
Lionberger  vs.  Kreiger,  88  Mo.  160. 
Bank  vs.  Wallaston,  13  Harr.  (Del.)  90. 


CHANGE   OF  EMPLOYMENT.  181 

Held  otherwise  in — 

Grocers'  Bank  vs.  Kingman,  82  Mass.  473. 

]SJ"or  will  an  increase  of  tlie  capital  stock  of  a  railroad 
company  and  consequent  increase  of  duties  of  ticket  seller 
release   his   sureties. 

Eastern  K.  K.  Co.  vs.  Loring,  138  Mass.  381. 

"Where  one  railroad  which  had  leased  another  took  a  bond 
from  one  of  its  employees,  and  subsequently  the  two  rail- 
roads were  consolidated  Imder  a  new  name,  the  sureties  are 
liable  for  a  default  committed  after  the  consolidation. 

Pa.  &  ITorthwestern  K.  E.  Co.  vs.  Harkins,  149  Pa. 
St.  121. 

132. — Change  in  Partnership  of  Risk. 

Where  a  firm  composed  of  A.  &  E.  were  appointed 
agents  and  gave  bond  with  sureties  conditioned  against  loss 
through  neglect,  carelessness,  theft  or  fraud  of  A.  and  E., 
or  either  of  them,  or  anyone  to  whom  they  may  entrust 
the  business  of  the  obligee,  and  where  a  suit  on  said  bond 
was  defended  on  the  ground  that  the  bond  secured  the 
honesty  of  the  firm  only,  and  that  before  the  embezzlement 
in  question  took  place  E.  had  withdrawn  from  the  firm,  and 
that  at  the  time  of  the  alleged  misappropriation  the  busi- 
ness of  the  agency  was  being  carried  on  by  A.  and  L.,  it 
was  held  the  sureties  were  not  liable  for  the  misappropria- 
tion by  one  of  the  members  of  such  firm  after  the  dissolu- 
tion of  the  partnership. 

Standard  Oil  Co.  vs.  Arnestad,  6  'N.  D.  255. 

Where  a  corporate  fidelity  bond  Avas  executed  on  behalf 
of  an  individual  factor,  who  was  a  member  of  a  firm  which 
was  imder  contract  with  the  obligee,  and  such  contract  was 
made  known  to  the  surety,  and  where  said  individual  agreed 
to  keep  the  funds  of  the  obligee  separate  from  any  other 


182  TllK    LAW    OK    l\\)l:IA'VY    liO.NDS. 

funds,  held,  liiat  tlic  obligc;e  could  recover  (Jii  tLe  iiideiniiity 
contract,  though  its  business  with  the  factor  was  in  the 
name  of  the  firm  of  which  he  was  a  member. 

Clifton  Mfg.  Co.  vs.  United  States  Fidelity  k  Guar- 
anty Co.,  60  S.  C.  128. 

The  sureties  on  the  bond  of  a  general  agent  to  sell  sew- 
ing machines  are  not  released  by  the  taking  of  a  partner 
by  such  agent  and  the  goods  being  delivered  to  the  place 
of  business  of  the  partnership. 

Palmer  vs.  Bagg,  56  N.  Y.  523. 

But  where  the  sureties  had  obligated  themselves  to  pay 
the  every  indebtedness  of  such  an  agent  and  he  subsequently 
took  a  partner,  held,  the  sureties  only  liable  for  indebted- 
ness of  their  principal. 

White  Sewing  Machine  Co.  vs.  Hines,  61  Mich.  423. 

And  where  an  insurance  agent,  with  knowledge  of  the 
company,  took  a  partner,  held,  to  release  sureties. 

Conn.  Mutl.  Life  Ins.  Co.  vs.  Scott,  81  Ky.  540. 

Held  otherwise  in — 

Gilbert  vs.  State  Ins.  Co.,  3  Kan.  App.  1.   . 

133. — Change  in  Partnership  of  Obligee. 

The  formation   of  a   partnership   by  the   employer,   to- 
gether witli   n  verbal  change  in  the  compensation  of  the 
employee,  will  release  the  surety  of  the  latter. 
Bagley  vs.  Clarke,  20  Super.  Ct.  94. 

134. — Miscellaneous  Cases. 

A  private  fidelity  bond  guaranteeing  the  performance  of 
a  sewing  machine  agent's  contract  provided  that  said  con- 
tract might  be  varied  or  modified  by  mutual  agreement  as 
to  the  manner  of  carrvins:  on  the  business  or  as  to  the  com- 


CHANGE   OF  EMPLOYMENT.  183 

pensation  of  the  agent.  Held,  such  provision  did  not  au- 
thorize the  agent  to  have  in  his  possession  a  larger  number 
of  machines  than  the  number  specified  in  the  contract. 

Victor  Sewing  Machine  Co.  vs.  Scheffler,  61  Calif. 
530. 

D.  with  sureties  gave  bond  dated  1873,  reciting  that  he 
had  been  appointed  an  assistant  clerk  to  the  bank,  and 
conditioned  for  the  faithful  performance  of  his  duties,  as 
such.  From  1872  until  1874  he  held  the  lowest  position  in 
the  bank.  In  the  latter  year  he  was  promoted  to  the  next 
highest  clerkship  at  an  increased  salary.  In  1876  he  was 
further  promoted  to  the  position  of  bookkeeper,  and  took 
charge  of  the  individual  debit  and  credit  books  and  exclu- 
sive charge  of  the  individual  ledger.  His  place  as  book- 
keeper was  so  near  the  money  drawer  that  he  might  have 
abstracted  funds  therefrom  and  covered  the  fraud  by  alter- 
ing the  footings  of  the  books.  His  embezzlements,  begin- 
ning in  1876,  amounted  to  a  large  sum,  and  were  concealed 
by  false  entries  in  the  books.  After  his  second  promotion 
his  sureties  had  no  notice  of  the  change  made  by  the  bank 
in  his  position  and  duties.  Upon  a  suit  on  the  bond,  held, 
that  the  defendants  were  not  liable  for  any  want  of  faith- 
fulnes  on  the  part  of  D.  after  his  second  promotion. 

That  when  he  was  promoted  to  the  position  of  book- 
keeper he  ceased  to  be  an  assistant  clerk  within  the  meaning 
of  the  bond. 

That  upon  a  fair  construction  of  the  contract,  the  sureties 
could  not  have  contemplated  a  liability  after  such  a  promo- 
tion. 

That  the  promotion  involved  a  material  alteration  of 
the  principal's  duties,  increased  the  perils  of  the  sureties, 
and  released  them  from  the  bond. 

Manufacturers'  Bank  vs.  Dickerson,  41  iST.  J.  L.  448. 

See  generally — 

Brillion  Lumber  Co.  vs.  Barnard,  131  Wis.  284 


184 


THK    LAW    OF    IIDKLITY    H<K\DS. 


iSuretic's  uii  an  oilicial  bond  are  discliarged  when  the  du- 
ties and  obligations  of  the  office  are  essentially  changed  by 
statute  and  their  risk  increased. 

The  imposition  of  new  duties  upon  an  officer  does  not 
change  his  oHice,  but  invests  him  with  a  new  office. 
White  vs.  East  Saginaw,  43  Mich.  567. 

In  an  action  upon  a  corporate  fidelity  bond  filed  as  the 
official  bond  of  a  register  in  chancery  to  recover  money  re- 
ceived by  such  register  and  deposited  to  his  credit  in  a 
bank,  Avhereby  it  was  lost  to  the  plaintiff  by  reason  of  the 
bank's  failure,  a  plea  which  sets  up  as  a  defense  that  the 
sum  claimed  was  received  by  the  register  who  preceded  the 
defendant  in  the  office  and  by  him  deposited  in  said  bank, 
and  that  upon  the  defendant's  coming  into  office  his  prede- 
cessor gave  a  check  for  said  sum  upon  said  bank,  which 
check  was  placed  to  the  credit  of  the  defendant  as  register 
in  chancery  on  the  books  of  said  bank,  after  which  time  the 
bank  failed,  presents  no  defense  to  the  maintenance  of  the 
suit. 

Parks  vs.  Bryant,  142  Ala.  627.1 

To  the  same  effect  is  another  late  case : 

A  bond  taken  by  a  county  judge  from  an  official  followed 
the  statute,  and  the  fact  that  it  did  not  follow  the  letter  of 
the  Act  creating  the  fund  sought  to  be  secured  by  the  bond 
did  not  release  the  surety,  for  by  the  terms  of  the  statute 
the  bond  is  binding. 

United  States  Fidelity  &:  Guaranty  Co.  vs.  Common- 
wealth, 31  Kv.  L.  R.  1179. 


1.— See  U.  S.  Fidelity  &  Guar- 
anty Co.  vs.  T'nion  Trust  &  Sav- 
ings Co.,  142   Ala.   .^)32.  Chap.   7. 


sec.   105,   ante,  for  another   case 
referrint:  to  same  controversy. 


FAITHFUL  PERFORMANCE  OF  DUTY. 


185 


CHAPTER  XV* 


FAITHFUL    PERFORMANCE    OF    DUTY. 


135.     Embraces   competency,  skill 
and  diligence,  as  well  as 
.     integrity. 


136.  Miscellaneous   cases. 

137.  Same. 


135. — Embraces  Competency,  Skill  and  Diligence,  as  Well  as  In= 
tegrity. 

The  tei-ms  "well  and  faithfully"  or  "faithfully,"  or  "well 
and  truly"  as  used. in  fidelity  bonds  are  equivalent  to  each 
other.  Morse  on  Banks  and  Banking,  sec.  24.  The  condi- 
tion of  an  official  bond  of  a  bank  cashier,  that  the  officer  who 
gives  it  shall  "well  and  truly"  execute  the  duties  of  his  office, 
included  not  only  honesty,  but  reasonable  skill  and  diligence. 
If  the  duties  are  performed  negligently  and  unskillf uUy ;  if 
they  are  violated  from  want  of  capacity  or  want  of  care; 
they  can  never  be  said  to  have  been  "well  and  truly  executed." 
Minor  vs.  Mechanics  Bank,  1  Pet.  46. 

A  bond  for  the  "faithful  performance"  of  duty  is  a  se- 
curity for  competent  skill  and  ordinary  diligence,  as  well  as 
for  integrity,  in  the  discharge  of  the  duties  of  the  office. 
American  Bank  vs.  Adams,  29  Mass.  303. 


So  the  condition  in  the  bond  of  an  assistant  cashier  of  a 
bank  that  he  will  "honestly,  faithfully  and  efficiently  dis- 
charge the  duties  of  such  position"  is  a  guaranty  not  only 
of  the  personal  honesty  of  such  officer,  but  also  a  guaranty 
of  his  competency,  skill  and  diligence  in  the  discharge  of 


18(>  TJIK    LAW    Ol''    JIJiKLirV    ItO.NDS. 

liis  duties.  Hence  his  sureties  are  liable  for  moneys  fraud- 
ulently withdrawn  from  the  bank  by  its  cashier  with  the 
knowledge  and  passive  acquiescence  of  the  assistant  cashier. 
Held,  further,  that  his  sureties  are  liable  for  loss  resulting 
from  his  negligence,  even  though  the  directors  may  not 
have  used  due  diligence. 

Fiiila  vs.  Ainsworth,  63  ISTeb.  1;  68  JiTeb.  308. 

The  sureties  in  the  official  bond  of  a  cashier  of  a  bank, 
conditioned  "that  he  shall  well  and  truly  perform  the  du- 
ties of  cashier,  to  the  best  of  his  abilities,"  not  only  under- 
take for  the  fidelity  and  honesty  of  the  principal,  but  also 
that  he  shall  perform  the  office  with  competent  skill  and 
ability;  and  if  he  transcends  the  known  powers  of  a  cash- 
ier by  changing  the  securities  of  the  bank  without  their 
knowledge,  and  loss  has  thereby  accrued,  the  sureties  are 
answerable  therefor. 

Barrington  vs.  Bank  of  Washington,  14  Serg.  A:  R. 
(Pa.)  405. 

Under  the  bond  of  a  bank  cashier  conditioned  for  faith- 
ful performance  of  duties,  his  sureties  are  liable  for  his  em- 
bezzlement of  the  funds  of  the  bank,  under  the  pretense  that 
he  had  borrowed  the  same. 

McShane  vs.  Howard  Bank,  73  Md.  135. 

The  condition  of  a  bank  teller's  bond  "faithfully  to  per- 
form all  the  duties  assigned  to  him  in  said  bond,  and  make 
good  to  the  said  bank  all  damages  which  the  same  shall 
sustain  through  his  unfaithfulness,  or  want  of  care,"  com- 
prehends damages  arising  from  his  want  of  care,  as  well  as 
from  his  unfaithfulness.  The  neglect  of  the  cashier  to 
settle  the  daily  accounts  of  the  teller  according  to  the  by- 
laws of  the  bank  does  not  discharge  the  sureties. 
Union  Bank  vs.  Forrest.  3  Cr.  C.  C.  218. 


FAITHFUL  PERFORMANCE  OF  DUTY.  187 

A  private  fidelity  bond  on  behalf  of  a  saleswoman,  con- 
ditioned for  the  faithful  performance  of  duty,  was  breached 
by  her  failure  to  render  weekly  reports  as  required  by  her 
contract,  but  a  waiver  of  this  requirement  by  the  employer 
discharged  the  surety. 

Singer  Mnfg.  Co.  vs.  Boyette,  74  Ark.  1. 

The  charter  of  a  bank  reqr.ired  a  bond  from  the  cashier 
"with  condition  of  good  behavior."  The  bond  thereupon 
taken  was  conditioned  that  the  cashier  should  "well  and 
truly  and  with  fidelity  perform  and  discharge  the  duties 
enjoined  on  him  as  cashier  of  such  bank,  agreeably  to  the 
laws  and  regulations  therein  made  and  provided."  Held, 
that  the  condition  of  the  bond  was  a  sufficient  compliance 
with  the  charter  and  was  valid. 

Farmers  &  M.  Bank  vs.  Polk,  1  Del.  Ch.  167. 

136. — Miscellaneous   Cases. 

The  by-laws  which  define  the  duties  of  the  secretary  of  a 
savings  bank  enter  into  and  form  part  of  the  contract  of 
the  sureties  upon  the  bond  of  the  secretary,  which  is  con- 
ditioned that  he  shall  faithfully  perform  the  duties  of  his 
office  so  long  as  he  shall  be  continued  in  said  office,  and  do 
all  things  required  of  him  by  the  by-laws  of  the  corpora- 
tion. 

Humboldt  S.  k  L.  Soc.  vs.  Wennerhold,  81   Calif. 
528. 

Where  a  bond  stipulates  that  the  secretary  of  a  corpora- 
tion shall  in  all  respects  fully,  faithfully,  well  and  truly 
perform  all  the  duties  of  his  said  trust  according  to  the  con- 
stitution, by-laws,  rules  and  regulations  of  said  association, 
and  at  the  end  of  his  official  term  surrender  all  books,  etc. ; 
he  must  exercise  reasonable  diligence  in  paying  over  any 
moneys  received  by  him,  and  if  he  fail  to  do  so,  and  the 
monevs  are  stolen  from  him,  he  is  liable  therefor.     So  also 


188  TIMO   LAW    OF   I'IDKLITY   BONDS. 

are  his  sureties.     (Safe  in  office  of  corporation  broken  open 
and  robbed  at  night.) 

Odd  Fellows'  Mutl.  Aid  Assn.  vs.  James,  63  Calif. 

593. 
(See  Chicago,  B.  &  Q.  R.  R.  Co.  vs.  Bartlett,  120 
Til.  603.) 

The  provision  in  an  insurance  company  official's  bond 
that  he  shall  "faithfully  perform  all  other  duties  now  or 
hereafter  required  of  him  by  virtue  of  his  office,"  not  only 
has  reference  to  matters  previously  enumerated  in  the 
bond,  but  includes  any  breach  of  duty. 

Where  the  articles  of  a  mutual  insurance  company  pro- 
vide for  the  creation  of  a  fund  to  pay  the  expenses  of  liti- 
gation, a  diversion  by  an  official  to  that  purpose  of  assess- 
ments collected  to  pay  death  losses  is  a  breach  of  the  con- 
ditions of  his  official  bond  providing  for  the  faithful  dis- 
charge of  duty. 

Sherman  vs.  Harbin,  125  Iowa,  179.^ 

The  sureties  on  the  bond  of  a  bank  clerk  conditioned 
that  he  should  well  and  faithfully  perform  the  duties  as- 
signed him  are  not  liable  for  losses  occasioned  by  his  mis- 
take, but  are  liable  for  such  losses,  though  the  mistake  was 
innocently  made,  where  it  is  concealed  by  fraudulent  en- 
tries on  the  books  of  the  bank. 

Union  Bank  vs.  Closey,  10  Johns.  271 ;  11  Johns. 
182  (K  Y.). 

Under  bond  for  faithful  performance  of  duties,  sureties 
are  not  liable  for  advances  made  to  insurance  agent. 
Burlington  Tns.  Co.  vs.  Johnson,  120  111.  622. 

The  bond  of  the  paymaster  of  a  railway  company  condi- 
tioned that  ho  would  faitlifully  perform  the  duties  required 

1. — See  Chapter  1.  sec.  17.  (7»/'' 


FAITHFUL   PERFORMANCE  OF  DUTY. 


189 


of  him  as  paymaster,  "and  promptly  pay  over  and  promptly 
account  for  all  moneys  belonging  to  the  company  received 
by  him  as  such  agent,  and  should  deliver  to  the  company 
all  property  belonging  to  it  when  required,"  does  not  make 
him  an  insurer  of  the  moneys  in  his  hands  against  theft  or 
robbery  without  his  fault  or  negligence. 

Chicago,  B.  &  Q.  R.  E.  Co.  vs.  Bartlett,  120  111.  603. 

(See  Odd  Fellows'  Mutl.  Aid  Assn.  vs.  James,  63 
Calif.  593.) 

The  sureties  on  a  general  freight  agent's  bond  are  not 
liable  for  default  of  his  subordinates  appointed  by  the  rail- 
road, under  a  general  clause  in  the  bond,  that  "such  agent 
shall  well  and  truly  perform  and  execute  the  duties  of 
freight  agent,  and  shall  render  a  just  and  true  account  of 
all  moneys,  &c.,  which  shall  come  into  his  charge  or  posses- 
sion." 

Chicago  &  Alton  R.  E.  Co.  vs.  Higgins,  58  111.  128. 

The  sureties  on  the  bond  of  a  bank  teller  conditioned  "to 
make  good  to  the  bank  all  damage  which  it  should  sustain, 
through  his  unfaithfulness  or  want  of  care,"  are  not  liable 
for  the  value  of  a  check  on  another  bank  cashed  by  the  teller 
in  the  usual  course  of  business  for  an  individual  of  good 
credit. 

Union  Bank  vs.  Mackall,  2  Cr.  C.  C.  695. 

137. — Same. 

A  teller  of  a  bank  is  not  liable  for  losses  incurred  during 
his  absence  from  the  bank.^ 

Bank  of  U.  S.  vs.  Johnson,  3  Cr.  C.  C.  228. 


2. — For  case  involving  unex- 
plained loss  of  bank's  funds,  to 
wtiich  several  employees  had  ac- 
cess,  see  United   States   Fidelity 


&  Guaranty  Co.  vs.  Des  Moines 
Nat.  Bank.  145  Fed.  273.  Chapter 
8,  sec.  109,  ante. 


190  TJli;    LAW    OF    IIDKLITY    BONDS. 

Where  ii  fidelity  insurance  company  by  its  bond  cove- 
nants with  a  receiver  engag(!d  in  operating  a  railroad  that, 
during  the  continuance  in  force  of  such  bond,  certain  speci- 
•  fied  employees  of  the  receiver  shall  "faithfully  and  hon- 
estly discharge  their  duties,  &c.,  and  deliver  all  property, 
&c.,  belonging  to  the  employer,  or  for  which  the  employer 
shall  be  liable  to  another." 

Held,  the  insurance  company  was  not  liable  for  damages 
resulting  from  a  wrongful  delivery  of  freight,  such  delivery 
having  been  made  prior  to  the  execution  of  the  bond. 
Dorsey  vs.  Fidelity  &  Casualty  Co.,  98  Ga.  456. 

See  in  this  connection  Chapter  8  on  Culpable  ISTegligence. 


TEEM   OF  OFFICE. 


J91 


CHAPTER  XVL 


TERM    OF    OFFICE. 


1.JS.     Attachment     and     termina- 
tion of   liability. 

139.  Digest  of  authorities. 

140.  Same. 

141.  Same. 


142.  Same. 

143.  Same. 

144.  Same. 

145.  Bonds  of  public  officers. 

146.  Same. 


138. — Attachment  and  Termination   of  Liability. 

Little  difficulty  is  experienced  in  practice  in  determining 
the  period  covered  by  a  coi'porate  fidelity  bond,  for  the  rea- 
son that  such  bonds  almost  invariably  state  in  precise  terms 
the  time  of  the  commencement  and  termination  of  liability. 
In  private  fidelity  bonds,  however,  following  common  law 
forms,  the  question  frequently  arises  as  to  when  the  surety's 
liability  begins,  and  more  frequently  as  to  when  it  ends.  The 
varying  phraseology  in  the  recitals  in  such  bonds  renders 
generalization  in  the  application  of  the  decisions  inadvisa- 
ble, and  necessitates  an  examination  of  the  cases.  The  au- 
thorities are  therefore  here  collected,  and  provide  ready  ref- 
erence for  investigation  of  the  subject. 

« 
139. — Digest  of  Authorities. 

If  the  bond  of  a  bank  cashier  is  silent  as  to  the  term  for 
which  it  is  to  run,  the  Court  will  determine  its  life  from  the 
facts  and  circumstances  surrounding  the  parties  at  the  time 
of  its  execution,  and  where  it  was  given  by  a  bank  officer 
appointed  by  the  finance  committee  to  fill  a  vacancy,  it  will 
be  held  to  cover  the  period  intervening  between  such  ap- 
pointment and  its  confirmation  by  an  election  of  a  board  of 
directors. 

Fancher  vs.  Kaneen,  5  Ohio  Nisi  Prius,  n.  s.  614. 


192  'I'lIK    LAW    OF    I'IDKLITY    HONDS. 

Where  iieitlier  the  elmi'ter  nor  liy-laws  of  a  corjioratioii 
fixes  the  tonn  of  office  of  its  cashier,  but  vests  the  appoint- 
ment of  all  officers  in  the  "directors  for  the  time  being,"  a 
cashier  so  appointed  holds  his  office  during  the  pleasure  of 
the  directors,  unless  they  at  the  time  of  appointment  limit 
the  duration  of  his  office  to  a  specified  term.  Consequently, 
where  a  cashier  was  elected  and  gave  bond  in  one  year,  and 
Avas  re-elected  the  next  year,  but  failed  to  give  a  new  bond, 
it  was  held  that  he  was  in  office  by  virtue  of  his  first  elec- 
tion, and  his  sureties  were  liable  for  his  acts  during  the 
second  term. 

The  fact  that  the  bank  neglected  to  have  the  cashier's 
bond  renewed  on  his  re-election,  whereby  the  bond  of  the 
original  sureties  remained  in  force  after  the  period  they 
had  been  led  to  expect,  does  not  estop  tbe  bank  from  pro- 
ceeding on  the  bond,  it  not  appearing  that  the  expectation 
as  to  the  time  their  bond  was  to  be  in  force  was  due  to  rep- 
resentations by  the  bank. 

Sparks  vs.  Farmers'  Bank,  3  Del.  Ch.  274. 

Cashier  of  a  national  bank  gave  bond  conditioned  for 
the  faithful  performance  of  duty  "forever,  so  long  as  he 
should  occupy  the  position."  He  was  elected  to  hold  office 
during  the  pleasure  of  the  board  and  subsequently  was  an- 
nually re-elected  for  nine  years.  All  defaults  were  commit- 
ted after  the  first  year.  Held,  the  surety  was  not  liable. 
.      First  Xat.  Bank  vs.  Briggs,  69  Vt.  12. 

But  where  cashier  of  bank  Avas  elected  to  hold  his  office 
during  the  pleasure  of  the  board  of  directors  his  sureties  are 
liable  for  any  default  occurring  while  be  continues  to  act 
as  cashier. 

Phillips  vs.  Bossard,  35  Fed.  99. 

So  where  one  has  been  appointed  clerk  in  a  bank,  to  con- 
tinue in  office  during  the  will  of  the  present,  or  any  future. 


TERM  OF  OFFICEi.  193 

board  of  directors  of  said  bank,  the  office  is  not  an  annual 
one,  although  the  directors  are  elected  annually. 

Louisiana  State  Bank  vs.  Ledoux,  2  La.  Ann.  674. 

If  a  bank  treasurer  holds  the  office  for  no  fixed  term,  but 
at  the  sufferance  of  the  corporation,  and  the  bond,  purports 
to  be  given  for  an  unlimited  time,  and  not  for  a  particular 
term,  there  is  no  implied  limitation  of  it  to  any  other  term 
than  the  indefinite  one  he  was  holding.  In  such  a  case,  a 
limitation  is  not  implied  from  the  expiration  and  extension 
of  the  bank's  charter. 

Hall  vs.  Brackett,  62  N".  H.  509. 

140. — Same. 

Where  a  person  appointed  cashier  of  a  bank  by  the  board 
of  directors,  under  a  local  statute,  gave  a  bond  conditioned 
for  the  faithful  performance  of  his  duties,  without  any 
limitation  as  to  time,  and.  where  there  is  no  showing  that 
his  appointment  was  for  a  limited  period  or  that  he  was 
ever  reappointed.  Held,  that  the  mere  fact  that  the  direct- 
ors from  whom  he  received  his  appointment  held  their 
offices  'for  one  year  only  does  not  limit  the  liability  of  the 
surety  on  the  bond  to  one  year,  but  he  is  liable  for  any 
default  occurring  under  the  appointment,  whether  before 
or  after  the  expiration  of  the  year. 

■    Merchants'  Bank  vs.  Honey,  58  Kas.  603. 

One  was  elected  cashier  of  a  bank  in  1814  and  annually 
for  the  three  following  years  by  directors,  chosen  annually, 
and  he  contiuned  to  serve  till  1823,  when  he  committed  a 
breach  of  duty.  Held,  that  his  bond  given  when  he  was 
first  elected  for  the  faithful  performance  of  his  duties, 
"so  long  as  he  should  continue  in  said  office,"  extended  to 
said  breach. 

Dedham  Bank  vs.  Chickering,  20  Mass.  335. 

13 


194  Till',    LAW    OF    1  IDlJ.nv    BONDS. 

Oxw  luiviiiff  hccii  clcclod  dii'cctor  of  a  bank  in  1849,  gave 
at  that  time  a  hond  with  sureties,  conditioned  for  the  due 
perforniaiuH!  of  his  duties  as  director  "while  he  should  ho 
a  director  of  said  bank."  He  Avas  annually  re-elected  and 
acted  as  director  for  sevei-al  years  afterwards,  but  never 
gave  any  other  bond.  Jfcld.  that  the  bond  did  not  cover 
his  official  defaults  occurring  after  the  expiration  of  the 
term  of  office  under  iiis  first  election. 

Treasurer  vs.  Mann,  34  Vt.  371. 

A  bond  conditioned  foi-  the  proper  performance  by  a 
cashier  of  his  duties  "for  and  during  all  the  time  he  shall 
hold  the  said  office"  binds  the  sureties  for  all  such  time, 
irrespective  of  the  fact  that  he  is  reappointed  at  the  be- 
ginnnig  of  each  year. 

"Westervelt  vs.  Mohrenstecker,  76  Fed.  118. 

The  bond  of  a  bank  cashier  did  not  specify  the  term 
covered.  A  statute  in  force  at  the  time  made  such  term 
"one  year-^  and  until  their  successors  are  duly  elected  and 
qualified."  The  cashier  was  re-elected  at  two  successive 
annual  elections,  but  gave  no  new  bond.  During  the  third 
year  he  became  a  defaulter.  Held,  that  his  sureties  were 
not  liable.  The  bond  was  not  in  force  when  the  defalca- 
tion occurred. 

Savings  Bank  of  Hannibal  vs.  Hurst,  72  Mo.  507. 

A  surety  on  the  official  bond  of  an  officer  of  a  corpora- 
tion whose  term  of  office  is  one  year  is  not  liable  for  de- 
faults occurring  beyond  the  first  year ;  although  the  princi- 
pal is  continued  in  office  for  a  longer  ]ieriod  by  new  ap- 
pointments made  from  year  to  year. 

Kingston  Mut.  Tns.  Co.  vs.  Clark.  33  Barb.  (X.  Y.) 
196. 


TERM  OF  OFFICE.  195 

141. — Same. 

Where  the  cashier  of  a  bank  is  elected  ''for  one  year," 
and  the  recitals  in  his  fidelity  bond  refer  to  his  term  of 
office,  the  surety  on  his  bond  is  not  liable  for  defalcations 
committed  after  the  expiration  of  the  term  of  office  to 
which  the  bond  refers. 

Blades  vs.  Dewey,  136  I^.  C.  176. 

Sureties  on  the  bond  of  an  officer  of  a  private  corpora- 
tion whose  office  is  annual,  with  power  in  him  to  hold  until 
his  successor  is  elected  and  qualified,  are  bound  only  for  the 
year  for  which  he  was  chosen  and  for  such  further  time  as 
is  reasonably  sufficient  for  the  election  and  qualification  of 
his  successor,  and  no  longer.  Guaranteeing  the  good  faith 
and  honesty  of  such  officer  "during  his  continuance  in 
office,"  means  not  an  indefinite  period,  or  for  the  time  he 
may  possibly  hold  such  office  by  new  elections,  but  his  con- 
tinuance in  office  under  his  then  election  and  for  the  legal 
term. 

Mutual  Loan,  <S:c.,  Assn.  vs.  Miles,  16  Fla.  204. 

Under  a  statute  which  provided  that  a  cashier  should  re- 
tain his  place  until  removed  therefrom,  or  another  ap- 
pointed in  his  stead,  a  cashier  was  appointed  and  gave  bond 
for  the  faithful  discharge  of  the  duties  of  his  office.  He 
was  subsequently  reappointed,  but  gave  no  new  bond.  Held, 
his  sureties  were  liable  for  defaults  committed  during  the 
terms  to  which  he  was  reappointed. 

Amherst  Bank  vs.  Koot,  43  Mass.  522. 

The  bond  of  a  savings  bank  cashier  must  be  construed  in 
connection  with  the  terms  of  his  appointment,  and  if  his 
election  to  the  position  is  for  a  definite  period,  the  bond 
ceases  to  be  effective  on  the  expiration  of  the  term  and  the 


196  Tin:    i.AW    (U''    IJJJKLITV    BONDS. 

sureties  thereon  ai-e  not  liable  for  his  delalcution  occurring 
thereafter. 

Ida  Co.  Savings  Bank  vs.  yeidenstricker,  128  Iowa, 
54. 

No  form  of  adjudication  against  a  principal  can  pre- 
clude a  surety  from  showing  that  the  breach  of  duty  upon 
which  that  adjudication  was  founded  occurred  prior  to  the 
date  of  the  bond,  and  is  not  within  the  terms  of  the  con- 
tract, if  the  bond  is  not  retroactive. 
State  vs.  Banks,  76  Md.  137. 

142. — Same. 

Under  a  fidelity  bond  securing  against  personal  dishon- 
esty, the  obligor  is  not  liable  for  funds  collected  by  factors 
before  the  bond  went  into  effect,  although  afterwards  dis- 
honestly converted  by  them. 

Sinclair  &  Co.  vs.  National  Surety  Co.,  132  Iowa, 
549. 

Whether  a  secretary  of  a  corporation  was  a  defaulter  at 
the  time  his  bond  was  written  is  a  question  for  the  jury  in 
a  suit  on  said  bond. 

Anaheim  AVater  Co.  vs.  Parker,  101  Calif.  483. 

If  it  appears  from  all  the  circumstances  that  the  intention 
of  the  parties  to  a  fiduciary  bond,  given  to  secure  a  building 
and  loan  association  against  loss  by  its  secretary,  was  that 
the  contract,  being  unlimited  by  its  terms  to  the  unexpired 
part  of  the  secretary's  term,  should  cover  his  acts  of  defal- 
cation during  his  continuance  in  office,  whether  by  re-elec- 
tion or  holding  over,  the  bond  Avill  cover  the  principal's 
defalcations  according  to  such  intention.  Such  secretary 
was  elected  in  January,  1891,  and  was  in  that  position  when 
he  applied  in  October,  1805,  to  a  bond  company  to  become 
his  surety.  The  only  other  evidence  as  to  the  duration  of 
his  term  was  a  minute  in  the  record  that  he  was  elected  at 


TERM  OF  OFFICEi.  197 

a  meeting  held  on  Marcli  16tli,  1896.  There  was  no  by-law 
fixing  his  tenure.  The  bond  company  received  $50,  "as  the 
premium  for  one  year,"  and  issued  him  a  bond,  dated  Oct. 
28th,  1895,  which  was  not  by  its  terms  limited  in  duration, 
but  when  that  year  expired  a  premium  for  the  next  year 
was  demanded  and  paid,  and  what  was  called  a  "renewal 
bond"  was  issued.  Held,  that  the  parties  to  the  bond  under- 
stood that  it  was  to  covei*  any  defalcations  occurring  within 
one  year  from  the  date  of  the  bond,  and  that  it  was  not 
their  intention  to  limit  it  to  so  much  of  a  term  of  one  year 
as  was  unexpired  when  the  bond  was  issued. 

N'orth  St.  Louis  Bldg.  &  Loan  Assn.  vs.  Obert,  169 
Mo.  507. 

The  sureties  on  the  bond  of  the  treasurer  of  a  railroad 
company,  conditioned  for  the  faithful  discharge  of  duty 
"during  his  continuance  in  office  during  the  present  year 
and  for  such  period  as  he  may  from  time  to  time  be  elected 
to  said  office,"  are  not  liable  for  defaults  which  occur  after 
an  omission  to  re-elect  him  at  a  regular  meeting,  although 
he  continues  to  act  as  treasurer,  and  is  re-elected  at  the  next 
regular  meeting  thereafter. 

Lexington  &  W.  C.  K.  R.  Co.  vs.  Elwell,  90  Mass. 
371. 

143. — Same. 

An  antedated  bond  of  an  insurance  agent  does  not  bind 
the  sureties  for  the  period  preceding  the  date  of  its  deliv- 
ery if  its  language  is  not  retrospective.  A  surety  is  not 
presumed  to  have  meant  to  become  answerable  for  acts  com- 
mitted before  he  signed  the  obligation. 

Hyatt  vs.  Grover  &  Baker  Sewing  Machine  Co.,  41 
Mich.  225. 

The  bond  of  the  secretary  of  a  private  corporation  re- 
cited that  he  had  been  elected  for  tenn  of  one  year  or 


11)8  TIIK    LAW    OF    I  ll>l  I.ITY    BONOS. 

until  liis  siu'cossor  is  elected  and  qualified.  The  articles  of 
iucorpofiition  prdvidcd  tli;it  the  secretary  .sliould  liold  liis 
oiiice  till  his  successor  was  elected  and  qualified.  The  by- 
laws provided  that  he  should  keep  the  accounts  of  the  cor- 
poration, receive  the  moneys  and  pay  same  over  to  the  treas- 
urer. Having  held  over  and  acted  as  secretary  for  several 
months  after  the  expiration  of  the  year  for  which  he  was 
first  elected,  in  an  action  brought  by  the  corporation  against 
his  sureties,  held,  the  sureties  assumed  their  obligation  with 
reference  to  the  articles  and  by-laws,  and  cannot  question 
the  nature  of  the  duties  of  their  principal. 

The  obligation   of  the   sureties  was  not  limited  to  the 
first  year,  but  continued  during  the  entire  time  he  acted  as 
secretary,  and  it  is  immaterial  whether  the  shortage  oc- 
curred prior  or  subsequent  to  the  expiration  of  such  year. 
Danvers    Farmers'    Elevator    Co.    vs.    Johnson,    93 
Minn.  323. 

The  phrase  "during  such  further  time  as  (an  officer  of 
an  association)  may  continue  to  hold  said  office"  applies  to 
such  further  time  beyond  the  term  of  one  year  as  the  prin- 
cipal might  hold  the  office  by  virtue  of  his  first  election,  and 
that  it  was  not  intended  to  cover  the  time  under  which  he 
might  hold  office  under  any  subsequent  election. 
O'Brien  vs.  Murphy,  175  Mass.  253. 

Under  articles  of  incorporation  which  provide  that  the 
treasurer  shall  be  elected  annually,  and  shall  hold  his  office 
until  his  successor  shall  be  elected  and  qualified,  and  which 
make  the  giving  of  a  bond  a  necessary  qualification,  the  lia- 
bility of  the  sureties  on  such  a  bond,  continues  until  their 
principal's  successor  is  duly  elected  and  qualified. 

St.  Louis  Union  Society  vs.  Mitchell,  26  ^fo.  App. 
206. 


TERM  OF  OFFICE^  199 

144. — Same. 

A  bond  stipulating  for  the  good  conduct  of  an  officer 
holding  office  for  a  fixed  term,  and  until  "another"  officer 
be  appointed,  will  not  remain  in  force  after  the  reappoint- 
ment of  such  original  officer,  the  term  "another"  in  this 
case  not  meaning  another  person. 

Citizens'  Loan  Assn.  vs.  N'ugent,  40  N".  J.  L.  215. 

Where  an  agent  was  employed  and  gave  bond,  and  per- 
formed his  obligations  fully,  and  ceased  to  work  for  the  em- 
ployer for  two  years,  when  he  again  entered  said  employ- 
ment without  the  consent  of  the  surety.  Held,  the  surety 
was  not  liable  for  a  default  in  the  second  employment. 
Stone  vs.  Kennly,  24  Weekly  Dig.  (N.  Y.)  126. 

The  secretary  of  a  corporation  was  elected  June,  1881, 
for  one  year  and  until  his  successor  should  be  elected  and 
qualified.  He  thereupon  gave  a  bond.  The  by-laws  au- 
thorized the  directors  to  remove  at  pleasure  all  officers,  and 
fix  their  terms  of  office.  In  June,  1882,  the  secretary  was 
re-elected.  Held,  sl  suit  could  not  be  maintained  on  his 
bond  for  defaults  committed  after  his  re-election. 

Fresno  Enterprise  Co.  vs.  Allen,  67  Calif.  505. 

Where  a  bond  given  by  a  secretary  of  a  corporation  is 
not  retrospective  in  its  terms,  it  does  not  cover  past  delin- 
quencies, and  the  sureties  are  not  liable  for  money  converted 
by  the  secretary  prior  to  its  execution,  but  the  corporation  is 
bound  to  show  a  conversion  after  the  execution  of  the  bond 
in  order  to  charge  the  sureties. 

Anaheim  Water  Co.  vs.  Parker,  101  Calif.  483. 

A  bond  of  the  treasurer  of  a  corportaion  who  is  elected 
for  one  year,  which  provides  for  his  honesty  and  faithful- 
ness "during  his  continuance  in  office"  without  any  provi- 
sion showing  that  it  is  intended  as  a  continuing  security, 


200  TIIK    LAW    OF    JIDKLITY    BONDS. 

other  than  the  words  quoted,  is  limited  to  tlie  term  lor 
which  he  is  elected,  and  does  not  cover  defaults  made  after 
the  expiration  of  that  term  and  his  re-election. 

Ulster  Co.  Savings  Inst.  vs.  Ostrander,   163  X.  Y. 
430. 

Where  an  officer  who  is  elected  annually  gives  a  bond 
for  the  faithful  discharge  of  the  duties  of  his  office,  his 
sureties  are  bound  only  for  one  year,  although  there  is  no 
time  specified  in  the  bond  and  although  he  should  be  re- 
elected several  years  in  succession. 

South  Carolina  Soc.  vs.  Johnson,  1  McC.  (S.  C.)  41. 

See  also — 

Brillion  Lumber  Co.  vs.  Barnard,  131  Wis.  284. 

145. — Bonds  of  Public  Officers. 

While  not  properly  within  the  scope  of  this  work,  certain 
cases  relating  to  the  bonds  of  public  officials  are  here  ap- 
pended for  illustration  of  the  general  subject  under  dicus- 
sion: 

Sureties  on  the  general  bond  of  an  annual  officer  are  gen- 
erally held  to  be  liable  only  for  one  year.  The  sureties  are 
presumed  to  have  contracted  with  reference  to  the  law,  and 
the  general  words  of  the  obligation  are  restrained  and  lim- 
ited thereby. 

Brandt,  sec.  186. 

The  clause  in  a  bond  of  suretyship  for  a  public  official, 
guaranteeing  the  faithful  discharge  of  his  duties  for  a 
psecified  term  and  "until  his  successor  is  appointed,"  will 
not  hold  the  surety  for  defaults  committed  beyond  a  reason- 
able time  after  the  expiration  of  his  term,  and  what  is  rea- 
sonable time  is  a  question  for  the  jury. 

Camden  vs.  Greenwald,  65  X.  J.  L.  485. 


TEEM  OF  OFFICE,.  201 

Where  the  hond  of  a  city  treasurer  elected  to  succeed 
himself  is  conditioned  that  he  shall  well  and  faithfully  per- 
form the  duties  of  his  office  "for  and  during  the  term  for 
which  he  was  elected,  &c.,"  the  sureties  are  not  liable  for 
defalcations  prior  to  the  acceptance  and  approval  of  the 
bond  by  the  common  council,  though  it  is  of  prior  date, 
since  the  term  for  which  the  bond  is  given  does  not  com- 
mence until  such  bond  is  so  accepted  and  approved. 

Grand  Haven  vs.  U.  S.  Fidelity  &  Guaranty  Co.,  128 
Mich.  106. 

When  an  official  bond  is  given  by  an  officer  holding  for 
a  definite  term,  the  obligations  of  such  bond  being,  in  gen- 
eral terms,  conditioned  for  the  good  behavior  of  the  officer, 
will  not  extend  beyond  such  definite  term. 

!N'or  will  the  case  be  altered  by  the  fact  that  such  officer 

holds  for  a  definite  term,  and  until  his  successor  shall  be 

appointed,  such  latter  term  extending  the  obligation  to  a 

reasonable  period  only  for  the  appointment  of  a  successor. 

Rahway  vs.  Crowell,  40  K  J.  L.  207. 

Where  clerk  and  treasurer  of  a  city  was  elected  for  one 
year,  and  gave  bond  for  the  faithful  performance  of  his 
duties  "for  the  present  year,"  but  at  the  expiration  of  said 
year  held  over  during  the  next  year  until  he  was  suspended, 
no  successor  having  been  appointed,  it  was  not  error  in  the 
Court  to  charge  in  an  action  on  the  bond  that  said  treas- 
urer and  his  sureties  Avere  liable  for  all  moneys  that  came 
into  his  hands  as  such  treasurer  until  his  successor  was 
appointed. 

Mayor  vs.  Brooks,  49  Ga.  179. 

146. — Same. 

Sureties  for  the  fidelity  of  an  officer  appointed  for  a  lim- 
ited term  are  not  liable  for  his  defaults  beyond  the  term 
under  which  the  bond  was  furnished. 

State  vs.  Powell,  40  La.  Ann.  241. 


202  TJM';    LAW    OF    KlDKLirV    lt()M>S. 

WluTc  tlic  Icgislulurc  liiia  cxteudcd  tlic  term  oi  oliico  of 
uii  officer  beyond  the  limit  fixed  by  law  at  the  time  of  bis 
election  and  qualification,  the  sureties  upon  his  bond  can- 
not be  held  liable  for  his  official  acts  during  such  extended 
term. 

County  of  King  vs.  Ferry,  5  Wash.  536. 

The  fact  that  a  public  officer  continues  to  hold  offici'  and 
discharge  the  duties  thereof  after  the  expiration  of  his 
original  term,  whether  by  continuing  after  re-election  with- 
out qualifying  for  the  second  term,  or  by  holding  over  until 
a  successor  is  elected  and  qualified,  will  not  subject  the  sure- 
ties upon  the  official  bond  given  for  his  original  term  of 
oflice  to  liability  for  losses  sustained  by  him  while  so  hold- 
ing over  and  continuing  in  office  beyond  the  tenure  for 
which  the  bond  had  been  given. 

City  of  Ballard  vs.  Thompson,  21  Wash.  669. 

The  contract  of  a  surety  is  strictly  construed.  The  ex- 
tent of  his  liability  is  that  expressed  in  the  instrument 
signed  by  him,  or  necessarily  implied  in  the  words  used 
therein;  and  when  he  becomes  bound  for  the  act  or  de- 
faults of  an  officer,  public  or  private,  whose  term  of  office 
is  fixed  by  law,  or  prescribed  by  charter,  ordinance  or  by 
law,  and  such  specific  term  is  recited  in  the  bond,  subse- 
quent general  words  will  not  enlarge  the  term  or  the  obliga- 
iton  of  the  surety. 

Montgomery  vs.  Hughes,  65  Ala.  201. 
*  See  also  Anderson  vs.  Bellinger,  87  Ala.  334. 

Crescent  Brewing  Co.  vs.  Handley,  90  Ala.  486. 

May  vs.  Ala.  IN'at.  Bank,  111  Ala.  510. 

In  an  action  on  the  official  bond  of  the  city  clerk  of  the 
city  of  Montgomery,  Ala.,  it  was  held  there  was  no  liability 
on  the  sureties  on  such  bond  after  the  expiration  of  the 
term  fixed  by  the  charter  of  the  city. 

Montgomery  vs.  Hughes,  65  Ala.  201. 


TERM   OF  OFFICIi.  203 

When  tlie  term  of  office  for  wliich.  an  official  bond  has 
been  given  has  expired  and  no  second  bond  exacted,  the  re- 
sponsibilities of  the  sureties  on  the  first  bond  cannot  be  ex- 
tended so  as  to  hold  them  liable  for  the  acts  of  a  next  tenn^ 
for  which  other  sureties  on  a  new  bond  would  have  been 
responsible. 

Board  vs.  McKowen,  48  La.  Ann.  251. 

Sureties  for  the  fidelity  of  a  person  in  an  office  of  limited 
duration  are  not  liable  beyond  that  period,  nor  are  they 
liable  for  past  defaults,  unless  made  so  in  terms. 
Patterson  vs.  Freehold,  38  N.  J.  L.  255. 

A  bond  procured  by  a  State  officer  to  be  issued  by  a 
bonding  company  guaranteeing  the  faithful  performance  of 
duty  by  such  officer,  which  is  in  terms  indefinite  as  to  dura- 
tion, will,  in  the  absence  of  any  stipulation  to  the  contrary, 
be  regarded  as  remaining  in  force  during  the  incumbency 
of  such  officer  on  his  present  term. 

Bryant  vs.  Am.  Bonding  Co.,  77  Ohio  St.  90. 

Where  the  terms  of  a  bond  clearly  show  that  it  was  in- 
tended to  be  retrospective  as  well  as  prospective,  sureties 
may  be  held  liable  for  defaults  occurring  before  the  execu- 
tion of  such  bond. 

McMullen  vs.  Winfield  B.  &  L.  Assn.,  64  Kan.  298. 


204  TIIK    LAW    OF    Kini.MTY    BONDS. 


CHAPTER  XVn. 

SUCCESSIVE    BONDS. 
149.     Same. 


147.  Digest  of  authorities 

148.  Official  bonds. 


147. — Digest  of  Authorities. 

Much  lias  already  been  said  upon  this  subject  in  the 
chapters  on  Term  of  Office  and  Application  of  Payments  and 
Successive  Fidelity  Bonds.  Certain  additional  cases  are  here 
collected  illustrative  of  the  manner  in  which  liability  has 
been  determined  between  different  sureties  on  successive 
bonds  for  the  same  principal  in  the  same  position,  or  w^here 
the  bond  sued  on  only  covers  a  part  of  the  term  of  ser^dce. 

In  a  suit  by  a  building  association  against  its  former 
secretary  and  the  sureties  on  three  successive  bonds,  held, 
the  sureties  on  each  bond  were  only  liable  for  defalcations 
made  with  respect  to  funds  in  the  hands  of  the  principal  at 
the  time  of  the  execution  of  such  bond  and  such  funds  as 
subsequently  came  into  his  hands. 

Citizens'  Savings  L.  &  B.  Assn.  vs.  Weaver.  127  111. 
App.  252. 

Where  bond  was  given  to  cover  term  of  employment,  and 
subsequently  another  bond  was  given  and  accepted  for  one 
year,  and  old  bond  retained,  held,  liability  not  concurrent, 
but  confined  to  last  bond  for  defaults  committed  during  such 
year. 

Aetna  Life  Ins.  Co.  vs.  Am.  Suretv  Co..  34  Fed.  291. 


SUCCESSIVE   BONDS.  205 

Though  the  office  of  cashier  of  a  bank  is  usually  treated 
as  elective  for  one  year  only,  yet  the  surety  will  be  liable 
for  the  acts  of  such  cashier  if  he  continue  in  office  after  the 
year,  but  on  the  re-election  and  qualification  of  the  cashier 
for  a  second  term  the  liability  on  the  old  bond  ceases. 
Sparks  vs.  Farmers'  Bank,  3  Del.  Ch.  274. 

In  an  action  by  an  insurance  company  on  the  bond  of  its 
agent  to  recover  premiums  alleged  to  have  been  received  by 
the  agent,  and  which  he  failed  to  pay  over  to  the  com- 
pany, it  was  no  defense  to  the  action  that  the  agent  paid  to 
the  company  during  the  life  of  the  bond  a  sum  of  money 
equal  to  the  amount  of  the  premiums  collected  by  him  dur- 
ing that  time,  where  it  appears  that  the  agent  had  been 
acting  as  agent  for  the  company  prior  to  the  execution  of 
the  bond,  and  at  the  time  of  its  execution  was  indebted  to 
the  company,  and  the  premiums  collected  by  him  after  the 
execution  of  the  bond  were  applied  by  him  to  the  payment 
of  his  former  indebtedness  to  the  company. 

Boyd  vs.  Agricultural  Ins.  Co.,  20  Col.  App.  28. 

Presumably,  money  which  came  into  the  hands  of  an 
official  of  a  building  association  and  should  have  been  there 
was  still  in  his  possession,  and  the  burden  was  on  the  surety 
to  prove  that  the  funds  presumably  in  the  hands  of  his 
principal  had  been  misappropriated  before  he  became  liable 
on  the  bond. 

McMullen  vs.  T^infield  B.  &  L.  Assn.,  64  Kan.  298. 

One  had  been  elected  treasurer  of  a  society  annually  for 
a  number  of  years.  Upon  one  re-election  the  treasurer's 
books  showed  a  balance  in  his  hands.  He  gave  bond  witli 
sureties  to  deliver  at  the  expiration  of  his  term  all  moneys, 
etc.,  in  his  hands.  He  subsequently  resigned,  having  re- 
ceived since  his  last  election  less  money  than  he  paid  out 
during  the  same  time,  but  from  moneys  previously  received 
there  was  a  balance  against  him.     Held,  that  the  sureties 


206  Tin;  I, AW  OF  iii)i:i,nv  i'.onds. 

wore  liable  on  the  Ijuiid  at  the  suit  of  the  society.  The 
plaintiffs  were  not  bound  to  inform  the  sureties  of  the 
amount  with  which  the  treasurer  stood  charged  unless  asked. 
In  the  absence  of  evidence  to  show  that  he  had  used  the 
funds  improperly,  the  ])resumption  was  that  they  were  in 
his  hands  when  the  bond  was  given. 

Beyerlc  vs.  JIaiii,  61  Pa.  St.  226. 

When  suits  are  brought  by  the  same  plaintiffs  against  the 
same  i)rincipal  defendant  on  separate  obligations  to  secure 
the  faithful  ])erforniance  of  official  duties  by  the  principal 
defendant,  and  there  are  different  sureties  on  the  several 
bonds  Avhicli  were  given  for  different  terms  of  official  serv- 
ice, and  who  are  defendants  in  the  suits  brought  on  their 
respective  bonds,  the  suits  cannot  be  consolidated,  though 
the  plaintiff  may  be  unable  to  state  under  which  term  of 
official  service  a  misappropriation  of  funds  by  the  principal 
defendant  occurred. 

Screwmen's  Ben.  Assn.  vs.  Smith,  70  Tex.  168. 

148. — Official  Bonds. 

While  as  has  been  indicated  in  the  chapter  on.  Term  of 
Office,  a  consideration  of  the  subject  of  official  bonds  is  not 
properly  within  the  scope  of  this  work,  nevertheless  refer- 
ence to  such  cases  will  be  of  material  assistance  and  the  cases 
relating  particularly  to  the  point  under  discussion  are  here 
collected. 

Sureties  on  the  official  bond  of  an  officer  are  not  liable 
for  moneys  misapplied  before  the  date  of  such  bond,  but 
Avhere  an  indebtedness  is  shown  at  the  date  of  the  bond  the 
presumption  is  that  such  funds  were  in  the  hands  of  the 
principal,  and  the  burden  is  on  the  sureties  to  show  a  mis- 
appropriation prior  to  the  execution  of  the  bond. 

Hetten  vs.  Lane,  43  Tex.  270. 

Barrv  vs.  Scre"\vmen's  Ben.  Assn.,  67  Tex.  250. 


SUCCESSIVE    BONDS.  207 

In  an  action  by  the  State  upon  a  State  treasurer's  bond 
the  obligors  can  be  held  responsible  for  moneys  received 
officially  by  the  treasurer  during  the  period  covered  by  the 
bond,  and  applied  by  him  to  the  satisfaction  of  the  defalca- 
tions Avhich  he  had  committed  before  that  period,  the  State 
having  received  the  moneys  without  knowledge  of  the  mis- 
application. 

Sooy  vs.  State,  41  K  J.  L.  394. 

Where  a  city  treasurer,  who  was  a  defaulter  in  the  pre- 
vious years  of  his  official  existence,  is  elected  his  own  suc- 
cessor and  has  given  a  new  bond,  the  sureties  on  such  bond 
can  only  be  held  liable  for  his  failure  to  perform  his  official 
duties  during  the  time  he  held  office  under  his  last  appoint- 
ment. 

Independent  of  any  actual  appropriation  of  moneys  to 
make  good  the  misappropriation  of  previous  years,  sound 
legal  principle  will  not  permit  the  application  of  city  funds, 
received  by  the  treasurer  subsequent  to  the  taking  effect  of 
the  last  bond,  to  the  relief  of  the  sureties  on  the  bond  or 
bonds  covering  the  time  when  the  treasurer  was  guilty  of 
fraud  or  embezzlement. 

Hoboken  vs.  Kamena,  41  N.  J.  L.  435. 

.  Sureties  of  a  town  collector  are  liable  for  delinquencies 
caused  by  the  payment  of  prior  deficiencies,  if  the  funds 
were  received  in  good  faith  by  the  town. 

Inhabitants  vs.  Miles,  185  Mass.  582. 

The  sureties  on  the  official  bond  of  a  city  treasurer  are 
liable  only  for  defaults  of  their  principal  during  the  term 
for  which  their  bond  was  given ;  and  when  such  principal 
has  held  the  office  for  preceding  terms  their  liability  is  to 
be  determined  by  considering  the  term  for  which  they  were 
sureties  by  itself,  precisely  as  if  he  had  succeeded  some 
other  person,  and  then  requiring  them  to  account  for  all  the 
public  money  that  came  to  his  hands  during  that  term. 


'20S  TJIK   LAW    OF   FIDELITY    BONDS. 

A  dclaultiiig  afi;ciit  caiiiKjt  make  good  his  default  as  be- 
tween hiuiself  and  his  sureties,  on  the  one  hand,  and  his 
principal,  on  the  other,  by  taking  the  principal's  money  for 
the  purpose. 

Detroit  vs.  Weber,  29  Mich.  24. 

149. — Same. 

Where  an  officer  is  re-elected  and  becomes  his  own  suc- 
cessor, and  at  the  commencement  of  his  second  term  re- 
ports a  certain  sum  in  his  hands,  and  gives  bond  with  sure- 
ties to  account  for  and  pay  over  the  moneys  coming  into 
his  hands  during  the  term,  his  sureties  when  sued  will  be 
responsible  for  the  sum  so  reported  in  his  hands,  and  will 
not  be  allowed  to  show  that  the  defalcation,  in  fact,  oc- 
curred during  the  previous  term,  and  throw  the  liability  on 
his  sureties  for  that  term. 

Roper  vs.  Trustee,  91  111.  518. 

Sureties  on  the  bend  of  a  collector  for  taxes  are  not 
released  because  the  collections  covered  by  their  bond  have 
been  paid  into  the  treasury  on  account  of  the  tax  collector 
for  preceding  years.  Such  a  disposition  was  itself  as  much 
a  misappropriation  as  if  he  had  devoted  it  to  his  private 
debts.  » 

State  vs.  Powell,  40  La.  Ann.  234. 

When  a  deficit  is  shown  to  have  occurred  during  a  first 
term  of  an  official  he  will  not  be  permitted  to  apply  moneys 
subsequently  received  by  him  to  closing  up  past  accounts, 
thus  leaving  a  deficit  at  the  end  of  another  or  second  term. 
Board  vs.  McKowan,  48  La.  Ann.  251. 

The  sureties  of  a  reappointed  officer  are  liable  for  any 
balance  in  his  hands  at  the  time  of  his  reappointment, 
which  he  received  in  his  preceding  term. 

The  sureties  in  the  second  term  are  not  liable  for  a  de- 
fault committed  in  his  first. 


SUCCESSIVE   BO^'DS.  209 

But  no  default  will  be  presumed  because  a  balance  ap- 
pears to  have  been  in  his  hands  at  the  end  of  his  first  term. 

The  burden  of  proof  is  on  the  sureties  in  the  last  term 
to  show  a  default  if  any  occurred  prior  to  the  execution  of 
the  bond  by  themselves. 

Bruce  vs.  United  States,  17  How.  437. 

Where  a  public  officer  has  used  moneys  coming  into  his 
hands  officially  during  a  subsequent  term  to  make  good  a 
default  committed  by  him  in  a  prior  term,  the  sureties 
upon  his  bond  for  the  subsequent  term  are  liable  for  the  de- 
fault thereby  made  in  the  moneys  received  during  the  sub- 
sequent term. 

It  is  the  duty  of  an  officer  receiving  funds  during  a  sec- 
ond term  to  make  a  legal  application  of  them,  and  he  can- 
not legally  apply  them  to  the  payment  of  an  earlier  defal- 
cation ;  and  though  his  sureties  upon  his  bond  for  the  sec- 
ond term  are  not  liable  for  a  defalcation  which  occurred 
during  his  first  term,  they  are  liable  for  a  misapplication, 
of  funds  received  during  his  second  term  to  cover  such  prior 
defalcation. 

People  vs.  Hammond,  109  Calif.  384. 

In  an  action  upon  a  county  treasurer's  official  bond  to 
recover  a  shortage,  his  sureties  are  estopped  from  denying 
the  truth  of  their  principal's  reports  as  to  amount  of  monej? 
on  hand  made  just  prior  to  the  execution  of  the  bond  and 
during  its  life,  for  the  purpose  of  showing  that  the  defalca- 
tion occurred  during  his  previous  term. 

Territory  vs.  Cook,  2  Ariz.  383. 


14 


210 


TIIK    LAW    OF   FIDKI.n'Y    HONDS. 


CHAPTER    XVHL 


SIGNATURE    OF    PRINCIPAL. 


150.  Necessary    where   so   stipu- 

lated ill  tlie  contnut. 

151.  Leading  case. 

152.  Leading   case,   continued. 
15*.     Recent  decisions. 

154.  Reference  to  fidelity  bonds 
generally — Cases  in  con- 
flict. 


155.     Rules  as  established  iu  sev- 
eral States. 
l.")t;.     Miscellaneous  illustrations. 

157.  Digest  of   authorities   rela- 

tive to  bonds  other   than 
fidelity — Surety  liable. 

158.  Same — Surety  not  liable. 

159.  Miscellaneous  observations. 


150. — Necessary  Where  so  Stipulated  in  the  Contract. 

Corporate  fidelity  bonds  are  usually  in  the  form  of  indem- 
nnifying  contracts,  conditioned  to  bold  the  obligee  harmless 
from  loss  occasioned  by  the  fraud  or  dishonesty  of  the  em- 
ployee. He  is  required  to  sign  the  contract — not  to  bind 
himself  thereby  to  th'e  employer, — but  to  obligate  himself  to 
reimburse  and  save  harmless  the  surety  for  assuming  the 
obligation  on  his  behalf/  and  in  theory  to  give  assent  to  the 


1. — Where  a  surety  company 
furnishes  a  bond  on  the  express 
condition  that  the  principal  will 
indemnify  it  against  all  losses, 
attorneys'  fees  and  expenses  of 
every  kind  which  for  any  cause 
it  may  sustain  by  reason  of  hav- 
ing executed  the  bond,  such  sui-e- 
ty  may.  in  the  absence  of  bad 
faith,  recover  its  attorneys'  fees 
expended  iu  a  suit  on  the  bond, 
although  the  principal  employed 
counsel  to  represent  both  and  so 
notified  the  surety.  United  States 
Fidelitv  &  Guaranty  Co.  vs.  .John 


Hittle,  121  Iowa,  352. 

A  stipulation  on  the  part  of  an 
employee  in  his  application  to  a 
guaranty  company  for  a  bond 
guaranteeing  his  fidelity  that  re- 
ceipts showing  a  payment  by  said 
company  of  any  loss  on  his  ac- 
count shall  be  conclusive  evidence 
against  him  is  valid  and  binding 
and  not  against  public  policy. 
Guarantee  Co.  vs.  Pitts.  78  Miss. 
837.  Held  otherwise  in  the  eariy 
case  of  Fidelity  &  Cas.  Co.  vs. 
Eickhoff,  63  Minn.  170. 


SIGNATURE   OF  PRINCIPAL..  211 

suretyship.  Many  such  instruments  provide,  by  specific  stip- 
ulation, that  the  contract  shall  not  take  effect,  unless  so 
signed  by  the  "principal,"  the  subject  of  the  undertaking. 
Such  stipulations  are  valid  and  binding,  and  the  absence  of 
the  signature  of  the  principal,  unless  waived,  will  prevent  a 
recovery  on  the  contract. 

1 5 1- — Leading  Case. 

In  the  leading  case  of  Union  Central  Life  Ins.  Co.  vs. 
United  States  Fidelity  &  Guaranty  Co.,  99  Md.  423  (1904), 
suit  was  brought  by  the  insurance  company  against  the  fidel- 
ity company  upon  a  bond  executed  by  the  latter,  by  which  it 
gaiaranteed  the  honesty  of  an  employee  of  the  insurance  com- 
pany. The  bond  contained  the  following  provision :  ''That  it 
is  essential  to  the  validity  of  this  bond  that  the  employee's 
signature  be  hereunto  subscribed  and  witnessed."  There  is 
a  clause  in  the  bond  by  which  the  employee  covenants  and 
agrees  with  the  fidelity  company  that  he  will  save  and  keep 
harmless  that  company  from  and  against  all  loss  and  damage 
which  the  bonding  company  shall  or  may  at  any  time  sustain 
by  reason  of  having  entered  into  the  indemnity  bond.  At 
the  foot  of  the  bond  there  is  a  place  indicated  for  the  signa- 
ture of  the  employee  opposite  a  seal  intended  as  the  em- 
ployee's seal.  The  bond  sued  on  was  delivered  by  the  fidelity 
company  to  the  insurance  company,  but  it  never  was  signed 
by  the  latter's  employee  whose  fidelity  is  guaranteed.  The 
premium  was  paid  for  the  first  year.  Before  the  expiration 
of  the  first  year  the  bond  was  renewed,  upon  payment  of  an 
additional  premium,  and  a  renewal  receipt  was  given,  where- 
in it  was  stated  that  the  fidelity  company  continued  in  force 
the  same  bond  for  another  period  "subject  to  all  the  cove- 
nants and  conditions  of  said  original  bond  heretofore  issued 
on  the  15th  day  of  June,  1900."  Subsequently,  the  bond  was 
again  renewed,  and  a  second  renewal  certificate  of  the  same 


212  IlIK    J.AW    OF    J-lDKl.lTY    BONDS. 

tenor  and  rH'ccl  as  the  first  was  issued,  continuing  the  bond 
in  force  lor  another  year.  The  Court  sustained  a  demurrer 
to  the  declaration.  The  Court  of  Appeals,  speaking  by  the 
late  Chief  J  udge  McSherry,  said : 

152. — Leading  Case,  Continued. 

"The  sole  question  in  the  case  is  whether  the  failure  of 
the  appellant's  employee  whose  fidelity  was  guaranteed  to 
sign  the  bond  of  indemnity  prevented  the  bond  from  be- 
coming operative  and  eifective  *  *  *    If  a  recovery  be  per- 
mitted on  this  action,  it  must  be  had  in  spite  of  the  definite 
provision  that  the  bond  should  not  be  binding  unless  signed 
by  the  employee  whose  fidelity  it  was  intended  to  guaranty. 
The  provisions  which  have  been  quoted  above  are  declared 
in  the  bond  itself  to  be  'conditions  precedent  to  the  right 
on  the  part  of  the  employer  to  recover  imder  this  bond.' 
The  liability  of  an  indemnitor  is  measured  by  the  contract 
into  Avliicli  he  enters,  and  is  never  enlarged  by  mere  con- 
struction to  include  a  term  specifically  excluded.    Inasmuch 
as  an  indemnitor's  liability  is  one  dependent  wholly  upon 
contract,  it  Avould  be  anomalous  to  hold  that  he  is  answer- 
able imder  conditions  directly  contrary  to  the  express  stipu- 
lations of  his  undertaking.    When  he  covenants  to  be  bound 
provided  certain  antecedent  conditions  are  complied  with  bv 
the  party  indemnified,  in  the  very  nature  of  things  if  those 
conditions  are  not  fulfilled  his  liability  never  becomes  fixed. 
This  is  so  elementary  that  we  do  not  pause  to  cite  authori- 
ties in  support  of  it.     Giving  to  the  bond  of  indemnity  the 
most  liberal  construction  contended  for ;  treating  it  in  point 
of  fact  as  closely  akin  to  a  technical  policy  of  insiirance,  we 
cannot  understand  how  the  indemnitor  can  be  held  account- 
able upon  it  in  the  teeth  of  the  explicit  covenants  that  it 
should  not  be  answerable  imless  designated  provisions  dis- 
tinctly declared  to  be  conditions  precedent  to  the  validity 
of  the  bond  have  been  first  complied  with,  when  they  have 
not  been  observed  at  all.     It   is  true  that  an  indemnitor 
mav  Avaive  conditions  inserted  for  iis  protection,  but  there 


SIGJfATUKE    OF   PBI^N'CIPAL.  213 

is  no  averment  in  the  declaration  of  any  such,  waiver.  The 
renewal  receipts  are  explicitly  declared  to  be  subject  to  all 
the  covenants  and  conditions  contained  in  the  original  bond, 
and  if  the  bond  itself  was  inoperative  by  reason  of  the  fail- 
ure of  the  indemnified  to  have  its  employee  sign  it,  the  re- 
newal receipts  could  not  give  it  validity.  The  renewal  re- 
ceipts in  terms  reasserted  the  provisions  of  the  bond,  and  do 
not  purport  to  continue  the  bond  in  force  w^ithout  reference 
to  the  conditions  upon  the  observance  of  which  its  validity 
in  the  first  instance  depended.  *  *  * 

"The  life  insurance  company,  the  indemnified,  cannot 
complain  that  there  is  any  hardship  inflicted  upon  it  by  hold- 
ing the  bond  to  be  invalid  by  reason  of  the  failure  of  its  own 
employee  to  sign  it,  'because  it  had  possession  of  the  bond, 
and  had  control  of  its  employee  whose  fidelity  was  guaran- 
teed, and  the  failure  to  secure  that  employee's  signature  was 
due  to  its  own  omission  or  default  alone.  The  indemnity 
company  had  the  right  to  make  its  undertaking  depend,  as 
respects  its  validity,  upon  the  condition  that  the  indemni- 
fied employee  should  sign  the  bond.  The  condition  was  not 
unreasonable  or  illegal.  The  performance  of  it  was  within 
the  power  of  the  indemnified.  The  neglect  or  omission  of 
the  latter  to  comply  with  that  condition  precedent  cannot 
be  ignored  when  relied  on  by  the  indemnitor;  and  cannot 
give  efficacy  to  an  instrument  which,  by  its  unequivocal 
terms,  was  not  to  become  operative  until  that  specific  con- 
dition was  complied  with.  Without  prolonging  this  discus- 
sion, we  think  the  Court  was  clearly  right  in  sustaining  the 
demurrer  to  the  plaintiff's  declaration  and  its  judgment  will 
be  affirmed." 

153. — Recent  Decisions. 

This  case  was  quoted  with  approval  and  the  precedent  fol- 
lowed by  the  Supreme  Court  of  jSTew  York,  Appellate  Term, 
in  Adelberg  vs.  United  States  Fidelity  &  Guaranty  Co.,  90 
N".  Y.  Supp.  465 ;  and  Platauer  vs.  American  Bonding  Co., 


i^l-^t  TIIIO   LAW    OF   l-II)KLnV    BOMjS. 

92  K.  V.  Sui)p.  238.  To  Iho  siiriie  efFect  is  Blackmorc  vs. 
Cuannilcc  Co..  71  Fed.  .">G3,  and  United  States  Fidelity  & 
Giinriinty  ( 'oniiiany  vs.  Kidgley,  1)7  N.  W.  (Neb.)  836,  which 
held  further  that,  the  fact  that  tlie  obligor  retained  the  prem- 
ium ])aid  by  the  employee  does  not  constitute  a  waiver  of  the 
signature  of  the  employee  to  the  bond.  Somewhat  similar  to 
the  Union  Central  Life  Insurance  Co.  case  just  referred  to 
is  the  recent  case  of  Aetna  Indemnity  Co.  vs.  J.  R.  Crowe 
Coal  &  Mining  Co.,  154  Fed.  545.  in  which  there  was  a 
bond  and  three  renewals.  The  bond  was  not  signed  by  the 
employee  hut  his  execution  thereof  ivas  not  made  a  considera- 
tion for  nor  a  condition  of  the  creation-  of  liahility  hy  the 
insurer.  The  execution  of  renewals  on  said  bond  for  a  valu- 
able consideration  received  and  appropriated  by  the  defend- 
ant are  held  to  clearly  affirm  the  original  contract  notwith- 
standing the  absence  of  the  signature  of  the  employee,  and  to 
estop  it  from  asserting  its  invalidity  when  repeatedly  so  af- 
firmed by  it,  although  there  is  no  evidence  tending  to  show 
that  the  surety  had  loi  owl  edge  when  the  renewals  were  issued 
that  the  original  bond  had  not  been  signed. 

In  another  recent  case  (American  Bonding  &  Trust  Co. 
vs.  New  Amsterdam  Cas,  Co.,  125  111.  App.  33)  the  provi- 
sion in  the  bond  is  as  follows :  "That  it  is  essential  to  the  con- 
dition of  this  bond  that  the  employee's  signature  be  hereto 
subscribed  and  witnessed,  and  that  the  acceptance  of  the  em- 
ployer be  also  executed  in  like  manner."  Held,  the  bond  is 
not  invalid  for  the  failure  of  the  employer  to  sign  the  same 
until  after  it  had  expired  by  limitations. 

On  demurrer  to  the  declaration  it  was  held  that  where  a 
fidelity  insurance  company  received  premiums  for  two  re- 
newals of  a  bond,  ivith  Jcnowledgc  that  the  bond  was  not 
signed  hy  the  employee  whose  fidelity  was  insured,  as  re- 


SIGNATURE    OF   PRIXCIPAL.  215 

quired  bj  the  bond,  it  was  estopped  to  set  up  the  absence  of 
such  signature  to  prevent  a  recovery  on  the  bond. 

Proctor  Coal  Co.  vs.  United  States  Fidelity  & 
Guaranty  Co.,  124  Fed.  424. 

Where  the  corporate  fidelity  bond  of  the  secretary  of  a 
building  and  loan  association  was  not  signed  by  him,  but 
his  name  was  signed  on  the  back  thereof  as  attesting  the 
approval  of  the  bond  by  the  vice-president,  it  was  held 
such  attestation  did  not  constitute  a  signing  of  the  instru- 
ment, and  the  surety  was  not  liable. 

The  principal  of  a  bond  in  an  application  therefor  bound 
himself  to  the  surety  company  to  reimburse  it  for  all  loss, 
etc.,  it  might  incur  on  the  bond  or  any  renewal  thereof. 
Held,  that  since  the  reimbursement  of  the  surety  company 
was  not  the  sole  object  of  the  principal's  signature  on  the 
bond,  the  obligation  in  the  application  would  not  lessen  the 
necessity  for  his  further  signature  on  a  renewal  bond. 

North  St.  Louis  Bldg.  k  Loan  Assn.  vs.  Obert,  169 
Mo.  507. 

But,  it  seems,  where  the  sole  purpose  of  the  signature  of 
the  principal  is  for  the  purpose  of  contracting  to  reimburse 
the  surety,  and  the  bond  does  not  in  terms  provide  it  shall 
be  invalid  in  the  absence  of  such  signature,  that  in  such 
case  the  signing  of  the  application  for  that  purpose  would 
supply  the  omission. 
Ibid. 

154. — Reference  to  Fidelity  Bonds  Generally — Cases  in  Conflict. 

Passing  now  from  consideration  of  fidelity  indemnifying 
bonds  of  corporate  sureties  which  provide  therein  for  the 
execution  thereof  by  the  employee,  to  the  general  common 
law  form  of  fidelity  bond,  in  which  the  employee  is  named  in 
the  body  of  the  instrument  as  an  obligor,  and  which  purports 


21G  rilK    I, AW    OI'-    MKIJJIV    IJO.ND.S. 

to  biiul  him  with  the  sui-ely  to  the  ciiijtloyor  all  the  authori- 
ties ai;r('c  thiit.  as  remarked  l»_v  the  Sii|)remc  ('ourt  of  Ne- 
braska (47  Neb.  45G),  ''the  adjudications  are  hopelessly  ir- 
reconcilable." Probably  much  of  the  conflict,  apparent  and 
real,  has  grown  out  of  the  fact  that  in  the  earlier  cases,  deal- 
ing with  uHcomjx'nsated  individual  sureties,  the  rule  that 
sureties  are  favorites  of  the  law  was  applied,  while  in  later 
cases  this  nile  has  been  much  relaxed  and  held  altogether 
inapplicable  to  corporate  compensated  sureties.  (See  review 
of  authorities  under  Chapter  1.)  Notwithstanding  the  afore- 
said conflict,  various  attempts  have  been  made  to  formulate 
rules  to  cover  cases  of  this  kind.  Perhaps  the  most  recent  is 
that  of  the  United  States  Circuit  Court  of  Appeals  in  United 
States  Fidelity  &  Guaranty  Co.  vs.  Haggart,  163  Fed.  801. 
and  although  referring  to  the  bond  of  a  deputy  United  States 
IMarshall.  is  nevertheless  applicable  to  fidelity  bonds  gener- 
ally. 

In  all  cases  where  the  principal  in  a  bond  would  be  liable 
without  reference  to  the  bond  for  acts  which  constitute  a 
breach,  and  by  the  terms  of  the  bond  the  parties  bind  them- 
selves severally,  as  well  as  jointly,  to  perform  its  conditions, 
the  failure  of  the  principal  to  sign  the  bond  does  not  render 
it  void  as  to  the  surety  or  release  him  from  liability 
thereon. 

igg. — Rules  as  Established  in  Several  Stales. 

The  Supreme  Court  of  Illinois  says: 

"We  have  given  the  authorities  bearing  on  the  question 
due  consideration,  and  we  are  not  inclined  to  adopt  the  view 
held  by  the  Courts,  that  a  bond  signed  by  the  sureties  with- 
out the  signature  of  the  principal  may  not  be  binding  upon 
those  who  execute  it." 

Trustees  vs.  Sheik,  110  111.  579. 


SIGNATUEE   OF  PRINCIPAL.  217 

The  Supreme  Court  of  South  Dakota,  referring  to  official 
bonds,  says : 

"After  a  careful  review  of  the  authorities,  and  the  rea- 
soning upon  which  they  are  based,  we  think  the  better  rule 
is  that  an  official  bond  in  which  the  officer  is  named  as  prin- 
cipal, but  which  is  not  executed  by  him,  is  prima  facie  in- 
valid, and  not  binding  upon  the  sureties." 

Board  of  Education  vs.  Sweeney,  1  S.  D.  642. 

The  Supreme  Court  of  Missouri  says : 

"If  the  name  of  the  principal  is  called  for  in  the  bond, 
and  it  is  not  signed  by  him,  the  bond  is  not  only  void  as  to 
him,  but  to  all  who  sign  it  as  sureties,  whether  it  is  in  form 
joint  or  several;  and  in  order  for  the  obligee  to  hold  the 
surety  he  must  show  that  the  surety  consented  to  be  bound 
without  the  signature  of  the  principal." 

j^orth  St.  Louis  Bldg  &  Loan  Assn.  vs.  Obert,  169 
Mo.  507. 

Also  held  that  the  fact  that  the  surety  was  one  organized 
for  the  purpose  of  becoming  such  for  profit  was  immaterial. 
Ibid. 

See  also — Bunn  vs.  Jetmore,  7  Mo.  228. 

The  Supreme  Court  of  Oklahoma  says : 

"The  omission  of  the  name  of  the  principal,  as  one  of  the 
signers  of  a  bank  cashier's  bond,  even  where  his  name  ap- 
pears in  the  body  of  the  bond,  as  principal,  is  a  mere  tech- 
nical defect,  and  will  not  release  the  sureties,  except  in  case 
where  the  sureties  sign  upon  conditions  known  to  the  obli- 
gee, that  the  bond  is  not  to  take  effect  until  signed  by  the 
principal." 

Clark  vs.  Bank,  14  Okla.  572. 


218  TiiK  I, AW  OK  i.-ii)i;r,rrv  honds. 

156. —  Miscellaneous — Illustrntions. 

A  Federal  Court,  has  thus  statod  the  pruiKjsilion  : 

Where  tlic  faihirc  ttf  a  iiriiicipal  named  in  a  bond  to  sign 
it  in  no  way  affeets  the  rights  or  liability  of  the  sureties, 
as  where  he  is  equally  bound  by  the  contract  to  secure  the 
performance  of  which  the  bond  is  given,  and  under  the 
laws  of  the  State  the  rights  of  the  sureties  are  the  same  in 
that  case  as  though  he  has  signed  the  bond,  his  omission  to 
sign  it  does  not  relieve  the  sureties  from  liability  thereon. 
St.  Louis  Brewing  Assn.  vs.  Hayes,  97  Fed.  859. 

The  reason  underlying  the  discharge  of  the  sureties  from 
liability  in  cases  where  the  bond  has  not  been  signed  by  the 
principal  is  the  increased  liability  of  the  surety  caused  by 
the  failure  of  the  principal  to  sign  the  obligation  executed 
by  the  surety. 
Ibid. 

Brandt  on  Sur.  &  Guar.,  sec.  461,  holds: 

If  the  instrument  in  its  body  purports  to  be  signed  by 
the  principal,  but  is  not  so  signed,  this  is  sufficient  notice 
to  the  obligee  that  it  is  imperfect,  and  the  sureties  may 
show  as  a  defense  that  they  signed  upon  condition  that  the 
principal  also  should  sign. 

The  fact  that  the  instrument  is  not  executed  by  all  those 
named  in  its  as  obligors  is  sufficient  to  put  the  obligee  upon 
inquiry  and  charge  him  with  notice  of  the  condition. 

In  Goodyear  Dental  Vulcanite  Co.  vs.  Bacon,  148  Mass. 
542,  the  bond  of  the  treasurer  of  a  corporation  pui*porting  to 
have  been  executed  by  himself  and  sureties,  but  not  signed  bv 
principal  held  valid  on  demurrer  against  sureties. 

To  the  same  effect  is  Herrick  vs.  Johnson,  11  Mete. 
(Mass)   26,  on  indenture  of  employment.  . 


SIGNATURE   OF   PEIlSrCIPAL.  219 

But  see  Wood  vs.  Washburn,  19  Mass.  24,  discharging 
sureties  on  administration  bond  not  signed  by  principal, 
Bowditch  vs.  Haraion,  183  Mass.  290,  and  Russell  vs. 
Annable,  109  Mass.  72,  on  bond  to  dissolve  attachment,  and 
Bean  vs.  Parker,  17  Mass.  591,  on  bail  bond. 

In  Wild  Cat  Branch  vs.  Ball,  45  Ind.  213,  it  was  held 
that : 

Sureties  on  the  fidelity  bond  of  the  treasurer  of  a  private 
corporation  are  not  liable  where  the  bond  is  not  signed  by 
the  principal. 

To  the  same  effect  is — 

N"ovak  vs.  Pitlick,  120  Iowa,  286. 

157. — Digest  of  Authorities  Relative  to  Bonds  Other  Than  Fidel* 
ity — Surety  Liable. 

Briefly  reviewing  the  cases  on  bonds  other  than  fidelity, 
the  following  hold  that  the  surety  is  liable  notwithstanding 
the  failure  of  the  principal  to  sign : 

Indemnity  bond  to  ojficer — 

Woodman  vs.  Calkins,  13  Mont.  363. 
Leow  vs.  Stocker,  68  Pa.  St.  226. 
Bollman  vs.  Pasewalk,  22  Neb.  761. 

Indenture  of  employment — 

Herrick  vs.  Johnson,  11  Mete.  (Mass.)  26. 

To  pay  debts — 

•      Parker  vs.  Bradley,  2  Hill  (N.  Y.)  584. 

To  pay  claims — 

Williams  vs.  Marshall,  42  Barb.  524. 


220  rilK    LAW    OF    KIDII.nv    BONDS. 

Supersedeas — 

MoClellan  vs.  Pyett,  49  Fed.  259. 

Appeal — 

Kinc;  vs.  Thompson,  110  Fed.  .319. 
San  Roman  vs.  Watson,  54  Tex.  254. 
Lindsay  vs.  Price,  33  Tex.  280. 
Skelton  vs.  Wade,  4  Tex.  148. 
MoKellar  vs.  Peck,  39  Tex.  381. 

County  Treasurer — 

People  vs.  Breyfogle,  17  Calif.  504. 
State  vs.  Bowman,  10  Ohio  St.  445. 
Douglass  vs.  Bardon,  79  Wis.  641. 
Hall  vs.  Lafayette  Co.,  69  Miss.  529. 

School  Treasurer — 

Trustees  vs.  Sheik.  110  111.  579. 

State  Treasurer — 

State  vs.  Hill,  47  l^eb.  456. 

Contract — 

Kurtz  vs.  Forquer,  94  Calif.  91. 
Cockrill  vs.  Davie,  14  Mont.  134. 
People  vs.  Bartlett,  151  Mich.  233. 
Mayor  vs.  Kent,  25  J.  &  S.   CN.  Y.  Sup.  Ct) 
109. 

A  ttachment — 

Pierce  vs.  Miles,  5  Mont.  552. 
Langstaff  vs.  Miles,  5  Mont.  554. 
Mcintosh  vs.  Hurst,  6  Mont,  288. 


SIGNATURE   OF   PRINCIPAL,.  221 

Guardian — • 

Matthews  vs.  Mauldin,  142  Ala.  434. 

Bail  and  recognizance — 

Ullson  vs.  State,  29  Kas.  452. 

Tax  collector — 

Pima  Co.  vs.  Snyder,  5  Ariz.  45. 
MoLeod  vs.  State,  69  Miss.  221. 

Sherijf— 

State  vs.  McDonald,  40  Pac.  (Idaho)  312. 

Replevin — 

Philippi  Church  vs.  Harbough,  64  Ind.  240. 
Howe  vs.  Handlej,  28  Me.  241. 
Cahill's  Appeal,  48  Mich.  B16. 

158. — Same — Surety  Not  Liable. 

In  the  following  cases  the  surety  is  held  not  liable  in  the 
absence  of  the  signature  of  the  principal : 

Official — • 

Baker  Co.  vs.  Huntington,  48  Ore.  593. 
School  Dist.  vs.  Lapping,  100  Minn.  139. 

Executors  and  administrators — 

Weir  vs.  Mead,  101  Calif.  125. 
Wood  vs.  Washburn,  19  Mass.  24. 

City  recorder — 

City  of  Sacramento  vs.  Duiilnp,  17  Calif.  421. 


222  TJIK   ].A\V    OF    I'lDKHTY    BONDS. 

County  treasurer — 

People  vs.  HarUey,  21  Calif.  585. 

Appeal — • 

State  vs.  Austin,  35  Minn.  51. 
Ney  vs.  Orr,  2  Mont.  559. 
State  vs.  Haarla,  26  X.  W.  906. 

Prison  hounds — 

Curtis  vs.  Moss,  2  Rob.  (La.)  367. 

Dissolve  attachment — 

Bowditch  vs.  Harman,  183  Mass.  290. 
Russell  vs.  Annable,  109  Mass.  72. 
Clements  vs.  Cassilly,  4  La.  Ann.  380. 

Bail — ■  .     . 

Bean  vs.  Parker,  17  Mass.  591. 

Notary  Public — 

Martin  vs.  Horiisby,  55  Minn.  187. 

Probate  Judge — 

Board  of  Education  vs.  Sweeney,  1  S.  D.  642. 

Payment  of  money — 

Bonser  vs.  Cox,  4  Bear  (Eng.)  379. 

Township  treasurer — 

Johnston  vs.  Kimball,  30  Mich.  187. 

Forthcoming — ■ 

Green  vs.  Kindy.  43  Mich.  279. 


SIGNATURE   OF   PRINCIPAL.  223 

Cost- 
Hall  vs.  Parker,  39  Mich.  590. 

Constable — 

Bunn  vs.  Jetmore,  70  Mo.  228. 

Contract — • 

Gay  vs.  Murphy,  134  Mo.  99. 
Bjoin  vs.  Anglinn,  97  Minn.  526. 
Am.  Kad.  Co.  vs.  Am.  Bonding  &  Trust  Co.,  110 
N"-.  W.  (Neb.)   138. 


Sherijf- 


State  vs.  Martin,  56  Miss.  108.. 


159. — Miscellaneous  Observations. 

1^0  reference  is  here  made  to  those  cases  in  which  the 
public  official  having  enjoyed  the  emoluments  of  the  office  is 
held  estopped  to  deny  that  he  executed  the  official  bond. 

An  opinion  by  Chief  Justice  Marshall  held  that  a  bond 
could  not  be  delivered  to  the  obligee  as  an  escrow,  Moss  vs. 
Riddle  &  Co.,  5  Cranch,  351,  although  the  Supreme  Court 
had  previously  held  that  such  delivery  could  be  made. 
Pawling  vs.  United  States,  4  Cranch,  219. 

A  bond,  perfect  on  its  face,  apparently  duly  executed  by 
all  whose  names  appear  therein,  purporting  to  be  signed, 
sealed  and  delivered  by  the  several  obligors,  and  actually 
delivered  by  the  principal  without  stipulation,  reservation 
or  condtiion,  cannot  be  avoided  by  the  sureties  upon  the 
ground  that  they  signed  it  on  condition  that  it  should  not 
be  delivered  unless  it  should  be  executed  by  other  persons 
who  did  not  execute  it,  when  it  appears  that  the  obligee 


224  •J'lIK    LAW    ()!••    I'IDI.MIV    HONKS. 

had  no  notice  of  hwcIi  condition,  and  nothing  to  j)iit  him 
on  inquiry  as  to  the  manner  of  its  execution,  and  also  that 
lie  hiis  hccti  induced  upon  tlif  fnith  of  such  l)ond  to  act 
to  his  own  prejudice. 

Brandt,  Sec.  458. 


KNOWLEDGE   OF  DEFAULT,  225 


CHAPTER  XIX. 

WHAT    CONSTITUTES    ''KNOWLEDGE"    OF    DEFAULT. 


160.  Obligee  i-equired  to  act  on  |  161a.  Knowledge   of   unfavorable 

actual      knowledge,      not  '.  facts  not  connected  with 

mere  suspicion.  I  employnient. 

161.  Digest  of  autliorities. 


i6o. — Obligee   Required  to   Act  on   Actual   Knowledge,   Not  Mere 
Suspicion. 

Corporate  fidelity  bonds  nsiiallj  require  that  notice  be 
given  the  surety  of  any  default  or  serious  dereliction  of  duty 
on  the  part  of  the  employee,  immediately  after  knowledge  of 
such  fact  has  been  acquired  by  the  obligee.  As  to  what  con- 
stituted ''knowledge"  as  the  term  is  here  used  has  been  the 
subject  of  judicial  inquiry  in  several  cases.  It  seems  to  be 
welled  settled  that  the  obligee  is  not  required  to  give  notice 
to  the  surety  unless  and  until  he  has  actual  knowledge,  not 
constructive  notice,  or  merely  suspicion,  of  the  existence  of 
facts  which  would  justify  a  careful  and  prudent  man  in 
charging  another  with  fraud  or  dishonesty.  But  if  the  ob- 
ligee has  notice  of  facts  sufficient  to  put  him  upon  inquiry, 
he  is  obliged  to  investigate,  or  notify  the  surety  in  order  that 
it  may  have  an  opportunity  to  do  so. 

Fillowing  are  the  cases  upon  the  subject : 

i6i. — Digest  of  Authorities. 

A  provision  in  a  fidelity  insurance  bond  that  the  insur- 
ing company  shall  be  notified  of  any  act  by  the  employee 
which  may  involve  a  loss  for  which  the  company  is  re- 
sponsible "as  soon  as  practicable  after  the  occurrence  of 
15 


22G  TJIK    I, AW    OF    I-IDKLI'IY    HONDS. 

such  act  sliall  have  coiiic  to  the  knowledge  of  th(!  employer" 
does  no)  r('(|uir('  notice  unless  the  hank  had  knowledge,  not 
merely  sus]ticion,  of  the  existence  of  facts  which  would  jus- 
tify a  careful  and  prudent  man  in  charging  another  with 
fraud  oi-  dishonesty. 

Am.  Sur.  Co.  vs.  Pauly,  170  U.  S.  133. 

Am.  Sur.  Co.  vs.  Pauly,  170  U.  S.  160. 

Under  an  employer's  indemnity  bond,  providing  that  the 
employer  shall,  on  discovery  of  any  fraudulent  act  on  the 
part  of  the  bonded  employee,  immediately  give  notice  there- 
of to  the  indemnity  company,  the  employer  is  not  bound 
to  report  his  suspicions  to  the  company,  even  though  they 
are  strong  enough  to  justify,  in  his  opinion,  the  discharge 
of  the  employee;  but  after  suspicion  is  aroused  reasonable 
diligence  must  be  used  in  pursuing  inquiries  as  to  the  facts, 
fidelity  k  Guaranty  Co.  of  X.  Y.  vs.  Western 
Bank,  29  Ky.  L.  R.  639. 

An  employer's  liability  bond  provided  that  the  insurer 
should  indemnify  the  employer  against  fraudulent  or  dis- 
honest acts  of  the  employee  amounting  to  embezzlement  or 
larceny,  subject  to  the  condition  that  the  insurer  should  be 
notified  in  writing  of  any  fraudulent  or  dishonest  act  on 
the  part  of  the  employee  wliicli  might  involve  a  loss  for 
which  the  company  was  responsible,  immediately  after  the 
occurrence  of  such  act  should  have  come  to  the  employer's 
knowledge.  Tfrld,  that  the  notice  required  was  one  which 
would  charge  the  employee  with  the  commission  of  a  fel- 
ony, and  hence  the  employer  was  not  bound  to  give  such 
notice  until  it  has  acquired  knowledge  sufficient  to  justify 
a  reasonable  man  in  making  such  a  charge. 

Aetna  Tnd.  Co.  vs.  J.  R.  Crowe  Coal  and  Mining 
Co.,  154  Tod.  .545. 

Under  the  corporate  fidelity  bond  of  a  bank  employee, 
requiring  the  bank  to  give  notice  to  the  company  of  acts 


KNOWLEDGE   OF   DEFAULT.  227 

of  default  as  soon  as  sucli  acts  came  to  the  knowledge  of  tlie 
bank,  the  work  "knowledge"  means  actual  knowledge  and 
not  constructive  notice. 

Fidelity  &  Casualty  Co.  vs.  Gate  City  ISTat.  Bank, 
97  Ga.  634. 

The  obligee  in  the  bond  of  an  insurance  association  offi- 
cial is  not  under  obligations  to  notify  the  surety  of  the 
wrongful  act  of  such  official,  where  the  association  did  not 
have  actual  knowledge  of  the  wrongful  act  of  such  officer. 
Sherman  vs.  Harbin,  125  Iowa,  174. 

i6ia. — Knowledge  of  Unfavorable  Facts  Not  Connected  With  Eni= 
ployment. 

Unless  the  contract  especially  stipulates  for  notice  of  facts 
unconnected  with  the  subject  matter  of  the  guaranty,  such, 
for  example,  as  engaging  in  speculation,  or  gambling,  or  fre- 
quenting disreputable  resorts,  the  obligee  is  not  required  to 
give  notice  of  the  misconduct  of  the  employee,  unless  such 
misconduct  relates  to  the  service  in  which  he  is  engaged.^ 
The  decision  to  this  effect  by  the  Supreme  Court  of  Indiana, 
by  its  manifest  justice,  will  doubtless  commend  itself  to 
other  Courts : 

The  knowledge  by  an  employer  of  the  misconduct  of  an 
employee,  whose  conduct  and  fidelity  have  been  guaranteed 
by  another,  which  will,  if  concealed,  release  the  guarantor, 
must  relate  to  the  service  in  which  the  employee  is  en- 
gaged, and  must  be  something  more  than  mere  moral  de- 
linquency, unconnected  with  the  subject-matter  of  the  guar- 
anty. 

LaRose  vs.  Logansport  T^at.  Bank,  102  Tnd.  332. 

1. — See  Guarantee  Co.  vs.  Me- 
chanics' Savings  Banlv,  183  IT.  S. 
402.  Chap.  2,  sec.  53.  note. 


22b 


TUK    LAW    Ol'-    ]-|lJl.MlV    BONDS. 


CHAPTER  XX. 


162. 


163. 


KNOWLEDGE    OF    OFFICER    OF    CORPORATION. 

Corpora  tion     ordinarily  :    164.     Cases    holding    corporation 


bound    by    knowledge    of 
managing  officers. 
Cases    liolding    corporation 
bound    by    knowledge    of 
managing  agent. 


not   bound   by   knowledge 
of  managing  agent. 


162. — Corporation   Ordinarily   Bound   by   Knowledge   of   Managing 
Officers. 

In  the  preceding  chapter  reference  was  given  to  the  cases 
defining  what  constitutes  hiowledge  hj  the  obligee  of  a  de- 
fault on  the  part  of  the  employee.  Reference  is  here  made 
to  the  cases  in  which  the  obligee  is  a  corporation,  and  the 
subject  of  inquiiy  is,  under  what  circumstances  will  the  cor- 
porate obligee  be  bound  by  knowledge  or  information  by  one 
or  more  of  its  officers  or  agents  as  to  the  official  misconduct 
of  another  officer  or  agent  ? 

There  is  some  conflict  in  the  authorities.  The  rule  of  law 
would  seem  to  be  that  a  corporation  is  bound  by  the  knowl- 
edge of  its  managing  officers,  especially  if  acquired  in  the 
usual  course  of  the  business  of  the  corporation,  and  this  is 
doubtless  the  rule  deducible  from  the  authorities  subject  to 
the  exception  shown.  The  Supreme  Court  of  the  United 
States  in  the  case  of  Guarantee  Co.  vs.  Mechanics  Bank,  183 
U.  S.  402,  held  that  a  bank  was  chargeable  with  the  informa- 
tion received  by  its  president,  cashier,  and  two  directors  to 
the  eifect  that  the  bank's  teller  was  engaging  in  speculation, 
and  the  failure  to  convey  such  information  to  the  surety,  or 


KNOWLEDGE    OF    CORPOKATION    OFFICER.  229 

to  investigate  the  report,  prevented  a  recovery  on  the  bond  of 
the  teller, 

163. — Cases   Holding  Corporation    Bound   by   Knowledge  of   Man= 
aging   Agent. 

The  rule  finds  further  support  and  illustration  in  the  fol- 
lowing authorities: 

A  corporation   can   only   act   by   its   legally   authorized 
agents  or  officers,  and  a  knowledge  of  any  officer  or  agent 
in  respect  to  a  matter  pertaining  to  or  connected  with  his 
official  duty  is,  in  law,  the  knowledge  of  the  corporation. 
Delbridge  vs.  Lake,  82  111.  App.  388. 

The  knowledge  of  the  agents  and  officers  of  a  corporation 
regarding  business  in  their  charges  is  notice  to  the  corpora- 
tion; otherwise,  save  with  its  consent,  a  corporation  would 
never  be  bound  by  notice  of  any  sort. 

Union  Natl.  Bank  vs.  Ins.  Co.,  52  La.  Ann.  36. 

Knowledge  of  default  of  a  servant  received  by  the  agent 
of  a  private  corporation  having  supervision  over  such  serv- 
ant and  not  communicated  to  his  surety,  would  release  the 
surety  for  subsequent  defaults. 

Saint  vs.  Wheeler  &  Wilson  Mfg.  Co.,  95  Ala,  362. 

The  knowledge  of  the  president  and  secretary  of  a  life 
insurance  company  is  the  knowledge  of  the  company  em- 
ploying them. 

Conn.  Mutl.  Life  Ins.  Co.  vs.  Scott,  81  Ky.  540. 

The  knowledge  of  the  president  of  a  corporation  is 
knowledge  of  the  corporation.  Harrison  vs.  Lumbermen, 
&c.,  Ins.  Co.,  8  Mo.  App.  37.  In  Holden  vs.  N'ew  York 
and  Erie  Bank,  72  T^.  Y.  286,  it  was  held  that  a  bank  is 
chargeable  with  the  knowledge  of  its  cashier,  whether  ac- 
quired by  him  as  its  agent  or  individually. 


2JiO  I'lll-:    J. AW    Ol''    Kllil.ia  TV    IJO.NUS. 

'riic  I'lilc  is  ollierwise,  liovvcvcr,  wlicre  there  is  fi-aud  or 
(•<>lliisi(;ii  lictwccii  ilic  (itliccr  liiixiii^-  i<ii<)wle(lge  aii«l  tin-  bond- 
ed   ClllllldVCC. 

Jt  is  tlius  stated  by  the  Su])reine  Court: 

Tlie  presumption  that  the  agent  informed  his  principal 
of  wliat  his  duty  and  the  interests  of  his  principal  required 
him  to  communicate  does  not  arise  when  the  agent  acts  or 
makes  declarations  not  in  the  execution  of  any  duty  owing 
his  principal;  nor  any  authority  possessed  by  him,  but  to 
subserve  his  own  personal  ends  or  commit  some  fraud 
against  his  principal. 

Am.  Sur.  Co.  vs.  Pauly,  170  U.  S.  133. 

The  principle  of  law  discussed  in  the  case  of  The  Dis- 
tilled Spirits,  11  Wall.  356,  viz,  that  the  knowledge  of  an 
agent  is  in  law  the  knowledge  of  his  principal,  is  intended 
for  the  protection  of  the  other  party  (actually  or  construct- 
ively) to  a  transaction  for  and  on  account  of  the  principal 
had  with  such  agent.  In  the  very  nature  of  things,  such 
a  principle  does  not  obtain  in  favor  of  a  surety  who  has 
bonded  one  officer  of  a  corporation  so  as  to  relieve  him  from 
the  obligations  of  his  bond,  by  imputing  to  the  corporation 
knowledge  acquired  by  another  employee  subsequent  to  the 
execution  of  the  bond  (and  from  negligence  or  wrongful 
motives,  not  disclosed  to  the  corporation)  of"  a  wrong  com- 
mitted by  the  official  v.hose  faithful  performance  of  duty 
was  guaranteed  bv  the  bond. 

The  mere  knowledge  of  one  or  more  directors  of  a  bank, 
less  than  a  majority  of  the  board,  and  of  the  vice-president 
of  the  bank,  of  the  default  of  the  president,  is  not  imputa- 
ble to  the  bank. 

It  is  well  settled  that,  in  the  absence  of  an  express  agree- 
ment, the  surety  on  a  bond  given  to  a  corporation,  condi- 
tioned for  the  faithful  performance  by  an  employee  of  his 


KNOWLiJiJDGE    OF    COKPOKATIO^s    OiFICEK.  231 

duties,  is  not  relieved  from  liability  for  a  loss  within  tKe 
condition  of  the  bond  by  reason  of  the  laches  or  neglect  of 
the  board  of  directors,  not  amounting  to  fraud  or  bad  faith, 
and  that  the  acts  of  ordinary  agents  or  employees  of  the 
indemnified  corporation,  conniving  at  or  co-operating  with 
the  wrongful  act  of  the  bonded  employee,  will  not  be  im- 
puted to  the  corporation. 

Fidelity  &  Deposit  Co.  vs.  Courtney,  186  U.  S.  342. 

To  the  same  effect  is  the  following  case : 

Ordinarily  a  corporation  is  chargeable  with  any  facts 
which  are  known  to  its  agents,  but  in  transactions  of  a  dis- 
honest character  between  co-employees,  where  one  partici- 
pates in  the  perpetration  of  a  fraud  upon  the  corporation 
for  the  benefit  of  the  other,  the  law  does  not  infer  that  the 
agent  will  communicate  the  facts  to  the  corporation,  and 
under  such  circumstances  the  corporation  is  not  bound. 
Wells-Fargo  &  Co.  vs.  Walker,  9  N.  M.  456. 

164. — Cases    Holding   Corporations    Not   Bound    by    Knowledge   of 
Managing  Agent. 

The  cases  given  below  appear  to  be  in  conflict  with  the 
general  rule : 

Where  a  corporate  fidelity  obligation  given  to  a  bank 
required  the  bank  to  give  notice  of  default  of  an  employee 
immediately  after  knowledge  of  such  default  was  acquired, 
but  contained  no  stipulation  making  it  in  the  least  degree 
incumbent  upon  the  bank  to  exercise  any  diligence  or  care 
in  inquiring  into  or  supervising  the  conduct  of  the  em- 
ployee, or  any  of  his  co-employees,  and  imposed  upon  it  no 
duty  vouching  for  the  fidelity  of  the  latter,  information  or 
knowledge  on  the  part  of  the  bank's  cashier,  he  being  only 
such  a  co-employoo  as  to  the  matters  concerning  which  the 
company  had  sti])ulated  for  notice,  would  not  be  imputable 
to  the  bank  itself. 

Fidelity  cV  (^isualty  Co.  vs.  Gate  City  Xat.  Bank,  97 
Ga.  634. 


2'.}'2  THK    LAW    OK    IMDKLI  TY    BONDS. 

Under  llio  Code  of  the  State  of  Washington  providing 
that  all  corporate  management  shall  be  vested  in  a  board 
of  trustees,  where  an  application  for  fidelity  insurance  by 
a  building  and  loan  association  stated  that  the  secretary 
insured  derived  his  authority  from  the  board  of  trustees, 
knowledge  on  the  part  of  a  single  officer,  trustee,  or  the 
president  of  the  association,  that  the  secretary  was  indebted 
to  it  at  the  time  the  policy  was  issued  could  not  be  im- 
puted to  the  corporation  without  proof  that  the  officer's 
knowledge  had  been  communicated  to  the  board,  so  as  to 
constitute  a  breach  of  warranty  in  the  policy  that  the  secre- 
tary was  not  indebted  to  the  association  at  the  time  of  the 
issuance  thereof. 

Am.  Bonding  Co.  vs.  Spokane  Bldg.  &  Loan  See, 
130  Fed.  737. 

JEl.  1    •  1  J- 

For  further  consideration  of  the  general  subject  under  dis- 
cussion see  Chapter  4,  sec.  87,  et  seq.  ante 


BANK    EMPLOYEE. 


233 


CHAPTER  XXL 


BANK    EMPLOYEE. 


165.  Digest  of  authorities. 

166.  Same. 

167.  Same. 


168.     List    of    cases    relative    to 
bank  employees. 


165. — Digest  of  Authorities. 

The  liability  of  the  surety  on  the  bond  of  an  employee  of 
a  bank  differs  in  no  wise  from  the  liability  of  the  surety  on 
other  fidelity  bonds.  The  cases  here  collected  are  merely 
for  the  purpose  of  illustrating  the  general  subject,  and  of 
showing  a  variety  of  ways  in  which  the  question  has  arisen : 

Where  a  bank  teller  is  made  cashier,  the  fact  that  he 

continues  to  act  as  teller  does  not  increase  the  risk  of  the 

sureties  on  his  bond  as  cashier,  and  will  not  discharge  them. 

Hibernian  Savings  Bank  vs.  McGinnis,  9  Mo.  App. 

578. 


A  condition  in  the  bond  of  an  assistant  cashier  of  a  bank 
that  he  will  "honestly,  faithfully  and  efficiently  discharge 
the  duties  of  such  position"  is  a  guaranty  not  only  of  the 
personal  honesty  of  such  officer,  but  also  a  guaranty  of  his 
competency,  skill  and  diligence  in  the  discharge  of  his  du- 
ties. Hence  his  sureties  are  liable  for  moneys  fraudulently 
withdrawn  from  the  bank  by  its  cashier  with  the  knowl- 
edge and  passive  acquiescence  of  the  assistant  cashier. 
Held,  further,  that  his  sureties  are  liable  for  loss  resulting 
from  his  negligence,  even  though  the  directors  may  not 
have  used  due  diligence. 

Fiala  vs.  Ainsworth,  63  Neb.  1 ;  68  Neb.  308. 


2o-i  TJIK    LAW    Ol-'    I'lDKJ.riV    IJONDS. 

One  In't'iuuc  suiciy  ior  tlu-  good  conduct  of  a  cashier  of 
a  banking  company  upon  liis  reappointment  to  that  office. 
Before  such  reai)pointment  he  had  been  guilty  of  frauds 
on  the  company',  and  afterwards,  previous  to  an  examina- 
tion by  \\iv  directors  of  the  company  into  the  state  of  their 
casli,  he  borrowed  moneys  as  such  cashier,  which  he  placed 
in  the  bank,  and  thus  concealed  his  prior  defalcation;  and 
after  such  examination  he  took  out  the  said  moneys  and 
repaid  to  those  of  whom  he  had  borrowed  them. 

Held,  to  be  a  fraud  within  the  condition  of  the  bond 
given  upon  his  reapiHiintiiicnt. 

Ingraham  vs.  Alarine  Bank,  13  Mass.  208. 

The  mere  fact  that  the  directors  of  a  bank  knew  of  and 
sanctioned  overdrafts  will  not  release  from  liability  the 
sureties  of  a  teller  who  caused  a  loss  to  the  bank  by  per- 
mitting overdrafts. 

Market  St.  Bank  vs.  Stumpe,  2  Mo.  App.  545. 

In  an  action  on  the  bond  of  a  bank  teller  it  was  shown 
that  the  teller,  upon  being  discharged,  in  making  final  set- 
tlement of  his  accounts  stole  from  the  drawer  of  a  clerk  in 
the  bank  a  large  sum  of  the  bank's  money  and  paid  it  over 
to  the  cashier.  Held,  the  sureties  on  the  bond  of  the  teller 
were  liable  for  such  theft. 

State  Bank  vs.  Welles,  20  Mass.  394. 

In  an  action  against  the  sureties  upon  a  bond  given  to  a 
bank,  and  conditioned  for  the  faithful  discharge  by  C  of 
"all  his  duties  as  clerk  of  said  bank,"  and  against  the  mis- 
appropriation of  any  of  the  funds  of  the  bank  "which  may 
come  imder  the  care  or  control  of  said  C.  as  clerk,"'  the 
evidence  showed  that  C.  during  the  whole  term  of  his  em- 
ployment, performed  the  duties,  to  some  extent,  usually 
performed  by  a  teller,  of  paying  and  receiving  money  over 
the  eoimter  of  the  bank.  It  Avas  found  as  a  fact  that  **the 
duties  as  clerk"  contemplated  in   the  bond  did  not  mean 


BANK    EMPLOYEE.  235 

merely  duties  of  a  bookkeeper,  but  that  they  embraced  the 
duty  of  receiving  and  paying  out  money  at  the  counter  of 
the  bank. 

Held,   that  the   defendants  were  not  entitled  to   a   rul- 
ing as  matter  of  law  that  there  had  been  such  a  change  in 
the  duties  of  the  clerk  as  to  discharge  them  from  liability. 
Roolstone  Bank  vs.  Carleton,  136  Mass.  226. 

A  bank  may  maintain  an  action  on  the  bond  of  its  cash- 
ier for  the  balance  of  a  note  discounted  by  him  against  the 
instructions  of  the  directors,  even  after  it  has  brought  suit 
on  the  note. 

Cassell  vs!  Mercer  ^"at.  Bank,  22  Ky.  L.  R.  1009. 

1 66. — Same. 

The  cashier  of  a  bank  gave  bond  conditioned  that  he 
"shall  well  and  faithfully  discharge  the  duties  imposed 
upon  him  as  the  cashier  of  said  bank."  Held,  that  the  em- 
bezzlement by  the  cashier  of  the  funds  of  the  bank,  under 
the  pretense  that  he  had  borrowed  the  same,  was  the  direct 
violation  of  a  duty  imposed  upon  him,  and  was  a  breach 
of  the  condition  of  his  official  bond,  and  his  sureties  were 
therefore  responsible  for  loss  consequent  upon  his  dishon- 
esty. 

McShane  vs.  Howard  Bank,  73  Md.  135. 

The  bond  of  an  assistant  bookkeeper  of  a  bank  condi- 
tioned for  his  faithful  performance  during  the  time  he 
should  continue  in  its  employment  of  all  the  duties  and 
services  in  said  bank  which  should  "from  time  nt  time  be 
required  of  him,"  and  for  his  faithfully  and  honestly  ful- 
filling "all  the  trusts  that  shall  be  in  him  reposed,  in  his 
said  appointment  of  clerk  of  the  said"  bank,  was  discharged 
from  liability  where  his  position  was  frequently  changed, 
and  he  was  made  note  teller  and  discount  clerk,  in  which 


230  TIIK   LAW    OF    riDKMTY    BONDS. 

position   liii'frc  sums  of  moncv  wore  rocoivcd  by  him  daily 
and    his    rcs|>(iiisil)ilit y    was  fijivatly    increased. 
First  Nat.  P,ank  vs.  (Jerke,  68  Md.  449. 

The  surety  of  a  hank  cashier  is  not  liable  for  overdrafts 
on  the  bank  paid  by  tiie  cashier  without  authority  from  the 
bank  where  it  is  not  shown  that  the  cashier  received  any 
part  of  such  ainount  or  any  benefit  therefrom. 

Guarantee    Co.    of    N.    A.    vs.    Mechanics'    Savings 
Bank,  100  Fed.  5.59. 

167. — Same. 

It  was  not  negligence  to  intrust  a  bonded  bank  messen- 
ger with  the  keys  of  the  vault  and  combination  of  the  safe 
of  the  bank. 

German  Am.  Bank  vs.  Auth.  87  Pa.  St.  419. 

The  sureties  on  the  bond  of  a  bank  cashier  are  liable  for 
the  value  of  certain  shares  of  the  stock  of  the  bank  assigned 
to  him  by  a  debtor  of  the  bank  for  the  purpose  of  avoiding 
the  prohibition  of  the  National  Banking  Act  prohibiting 
a  national  bank  from  loaning  on  the  security  of  its  own 
shares,  and  to  procure  the  endorsement  of  certain  notes, 
which  stock  was  subsequent! v  ))l(>dged  by  the  cashier  as 
collateral  on  indivi  '  .c:..is  made  to  him  by  other  banks 
and  forfeited  and  sold. 

Walden  Nat.  Bank  vs.  Birch,  130  N.  Y.  221. 

A  bank  teller's  bond  covers  any  duties  to  which  in  the 
natural  course  of  the  business  of  the  bank  he  may  be  as- 
signed by  the  cashier  or  other  proper  officer. 

Detroit  Savings  Bank  vs.  Ziegler,  49  Mich.  157. 

The  by-laws  of  a  bank  providing  for  periodical  exami- 
nation of  its  affairs  formed  no  part  of  the  contract  of  a 
surety  on  the  bond  of  a  clerk. 

Louisiana  State  Bank  vs.  Ledoux.  2  La.  Ann.  674. 


BANK    EMPLOYEE.  237 

The  books  of  a  bank  and  the  statements  of  the  bank  sent 
to  the  Comptroller  of  the  Currency,  under  the  J^ational 
Banking  Law,  are  not  admissible  in  evidence  to  prove  the 
negligence  of  the  bank  officers  in  failing  to  discover  that 
the  cashier  was  a  defaulter,  nor  as  tending  to  establish  the 
fact  of  knowledge  on  the  part  of  the  bank  of  the  existence 
of  the  defalcation. 

Bowne'vs.  Mt.  Holly  Bank,  45  N.  J.  L.  360. 

See  also  in  this  connection  Chapter  14  on  "Uncommuni- 
cated  change  of  employment." 

1 68. — List  of  Cases  Relative  to  Bank  Employees. 

Appended  hereto  is  a  list  of  cases  dealing  with  the  liability 
of  sureties  on  bonds  of  bank  employees: 

Amherst  Bank  vs.  Boot,  43  Mass.  522. 
American  Bonding  Co.  vs.  Morrow,   96   S.  W. 

(Ark.)  613. 
Ashuelot  Savings  Bank  vs.  Albee,  63  N.  H.  152. 
American  Bank  vs.  Adams,  29  Mass.  303. 
American  Sur.  Co.  vs.  Pauly,  170  U.  S.  133; 

170  IT.  S.  160. 
Atlas  Bank  vs.  Brownell,  9  K.  I.  168. 
Blades  vs.  Dewey,  136  K  C.  176. 
Barrington  vs.  Bank  of  Washington,  14  Serg.  & 

K.  (Pa.)  405. 
Bank  of  Carlisle  vs.  Hopkins,  17  Ky.  245. 
Bank  of  Tarboro  vs.  Fidelity  &  Deposit  Co.,  126 

N.  C.  320;  128  K  C.  366. 
•     Bowne  vs.  Mt.  Holly  Bank,  45  N.  J.  L.  360. 
Bostwick  vs.  Van  Voorhis,  91  E".  Y.  353. 
Blackmore  vs.  Guarantee  Co.,  71  Fed.  363. 
Bank  vs.  Wallaston,  3  Harr  (Del.)  90. 
Bank  of  U.  S.  vs.  Johnson,  3  Cr.  C.  C.  228. 


238  riiK  LAW  oi'  I'lDi'.rjTY  ho.nds. 

JJutclielor  vs.   I'lantcr's  Nat.  Bank,  78  Ky.  435. 
Clark  vs.  Bank,  14  Okla.  572. 
Chew  vs.  Ellingwood,  86  Mo.  260. 
California  Sav.  Bank  vs.  Am.  Sur.  Co.,  87  Fed. 

118. 
Cassell  vs.  Mercer  Nat.  Bank,  22  Ky.  L.  R.  1009. 
Deposit  Bank  vs.  lleamc,  104, Ky.  819. 
Dime  Savings  Institution  vs.  American  Surety 

Co.,  68  N.  J.  L.  440. 
Detroit  Savings  Bank  vs.  Ziegler,  49  Mich.  157. 
Dedham  Bank  vs.  Chickering,  20  Mass.  335. 
Fanchor  vs.  Kaneen,  5  Ohio  nisi  pinus  n.  s.  614. 
First  National   Bank  vs.   Fidelity  t^'  Guaranty 

Co.,  110  Tenn.  10. 
First  National  Bank  vs.  Briggs,  69  Vt.  12. 
Fidelity  &  Deposit  Co.  vs.  Courtney,  186  U.  S. 

342. 
Fidelity  &  Casualty  Co.  of  New  York  vs.  Bank 

of  Timmonsville,  139  Fed.  101. 
First  Nat.  Bank  of  Nashville  vs.  National  Surety 

Co.,  130  Fed.  401. 
Frelinghuysen  vs.  Baldwin,  16  Fed.  452;  6  N. 

J.  L.  J.  207. 
Fourth  Nat.  Bank  vs.  Spinney,  120  N.  Y.  560. 
Farmers  &  Mechanics'  Bank  vs.   Polk,   1  Del. 

Ch.  167. 
Fidelity   &    Casualty    Co.    vs.    Gate   City   Nat. 

Bank,  97  Ga.  634. 
First  Nat.  Bank  vs.  Gerke,  68  Md.  449. 
Fidelity  &  Guaranty  Co.  of  N.  Y.  vs.  Western 

Bank,  29  Ky.  L.  R.  639. 
First  Natl.  Bank  of  Stanford  vs.  Mattingley,  92 

Ky.  651. 


BANK    EMPLOYEE.  239 

First  National  Bank  of  Omaha  vs.  Goodman,  55 

Neb.  418. 
Fiala  vs.  Ainswortli,  63  Neh.  1 ;  68  :Neb.  308. 
Fidelity  &  Casualty  Co.   vs.  Consolidated  Natl 

Bank,  71  Fed.  116. 
Grocers  Bank  vs.  Kingman,  82  Mass.  473. 
Garnett  vs.  Farmers  Nat.  Bank,  91  Ky.  614. 
Graves  vs.  Lebanon  Nat.  Bank,  73  Ky.  23. 
German  American  Bank  vs.  Auth,   87  Pa.   St. 

419. 
Guarantee  Co.  of  N.  A.  vs.  First  Nat.  Bank  of 

Lynchburg,  95  Va.  480. 
Guarantee  Co.  of  N.  A.  vs.  Mechanic's  Savings 

Bank,  183  U.  S.  402. 
Home  Savings  Bank  vs.  Traube,  75  Mo.  199. 
Hibernia   Savings   Bank  vs.    McGinnis,    9    Mo. 

App.  578. 
Hall  vs.  Brackett,  62  N.  H.  509. 
Hobart  vs.  Dovell,  38  N.  J.  Eq.  553. 
Ingraham  vs.  Maine  Bank,  13  Mass.  208. 
Ida   County    Savings    Bank   vs.    Seidenstricker, 

128  Iowa,  54. 
Jennery  vs.  Olmstead,  90  N.  Y.  363. 
Jackson  vs.   Fidelity  &  Casualty  Co.,   75   Fed. 

359. 
Lieberman   vs.    First   National   Bank,    2    Penn. 

(Del.)  416. 
Louisiana  State  Bank  vs.  Ledoux,   2  La.  Ann. 

674. 
Lionberger  vs.  Kreiger,  88  Mo.  160. 
LeRose  vs.  Logansport  Nat.  Bank,  102  Ind.  332. 
Market  St.  Bank.  vs.  Stumpe,  2  Mo.  App.  545. 
Mt.  Vernon  Bank  vs.  Porter,  52  jVIo.  App.  244. 
Morris  Canal  &  Banking  Co.  vs.  Van  Vorst,  1 

Zab.  (N.  J.)  100. 


240  TllK    LAW    OF    J-lDJiLlTY    JiONUS. 

^Morciiunlri  iJuiik  vt;.  iloucy,  oH   Kun.   UOo. 
JVlcSbauc  vs.  Howard  Uank,  73  Md.  135. 
Missouri  K.  &  T.  Co.  vs.  Geruiiin  iS'at.  Bank,  77 

Fed.  119. 
JMinur  vs.  jMecbanics  Bank,  1  Bet.  40. 
National  Bank  of  Asheville  vs.  Fidelity  &  Casu- 
alty Co.,  89  Fed.  819. 
National  Mechanics  Banking  Ass'n  v.  Conkling, 

90  N.  Y.  116. 
Pendleton  vs.  Bank,  17  Ky.  171. 
Phillips  vs.  Bossard,  35  Fed,  99. 
Planters  Bank  vs.  Larakin,  R.  M.  C.  (Ga.)  29. 
Pryse  vs.  Fanners  Bank,  17  Ky.  L.  R.  1056. 
Roolstone  Natl.  Bank  vs.   Carleton,   136  Mass. 

220. 
Sparks  vs.  Farmers  Bank,  3  Del.  Ch.  274. 
Savings  Bank  of  Plannibal  vs.  Hunt,  72  Mo.  597. 
State  vs.  Atherton,  40  Mo.  209. 
Shackaraaxon  Bank  vs.  Yard,  150  Pa.  St.  351. 
State  Bank  vs.  Welles,  20  Mass.  394. 
Treasurer  vs.  Mann,  34  Yt.  371. 
Tapley  vs.  Martin,  116  Mass.  275. 
Taylor  vs.  Bank,  25  Ky.  564. 
Third  Natl.  Bank  vs.  Owen,  101  Mo.  558. 
Ulster  Co.  Savings  Inst.  vs.  Young.  161  N.  Y. 

23. 
Union  Dime  Savings  Inst.  vs.  Feltz,  123  N.  Y. 

627. 
UnioD  Bank  vs.  Forrest,  3  Cr.  C.  C.  218. 
Union  Bank  vs.  Mackall,  2  Cr.  C.  C.  695. 
United  States  Fidelity  lS:  Guaranty  Co.  vs.  Des 

Moines  Nat.  Bank,  145  Fed.  273. 
United  States  Fidelity  <Sr  Guaranty  Co.  vs.  First 

National  Bank  of  Dundee,  233  HI.  475. 


INSURANCE    AGENT.  241 


CHAPTER  XXIL 

BONDS    OF    INSURANCE    AGENTS. 


169.  Important    case  —  Discus-    1  171.     Table  of  cases  on  bonds  of 

sion.  insurance  agents. 

170.  Digest  of  authorities. 


169. — Important   Case — Discussion. 

Inasmuch  as  there  has  been  considerable  litigation  relating 
to  the  bonds  of  insurance  agents,  a  list  of  substantially  all 
the  cases  on  the  subject  is  appended  to  this  chapter  for  the 
convenience  of  the  investigator,  and  to  enable  a  ready  refer- 
ence to  the  law  of  this  particular  branch  of  business. 

One  of  the  most  important  cases,  in  its  far  reaching  eifect. 
is  that  of  Williams  vs.  United  States  Fidelity  &  Guaranty 
Co.,  105  Md.  490,^  recently  decided  by  the  Court  of  Appeals 
of  Maryland,  a  synopsis  of  which  is  as  follows: 

Suit  was  brought  against  a  surety  company  on  an  in- 
demnity bond  given  to  a  fire  insurance  company  guaran- 
teeing it  against  loss  through  larceny  or  embezzlement  by 
an  agent  of  the  insurance  company.  A  breach  was  alleged 
in  the  declaration  and  a  statement  filed  claiming  that  there 
was  a  balance  due  the  insurance  company.  The  employee 
claimed  the  right  to  credits  for  returned  premiums  and  ex- 
penses in  excess  of  the  balance  against  him,  and  the  surety 
company  filed  a  bill  of  particulars  with  one  of  its  pleas 
showing  a  balance  in  favor  of  the  employee.  At  the  close  of 
the  plaintiff's  case,  the  lower  Court  granted  the  defendant's 

1. — See   Chapter    26,    sec.    185, 
post. 

16 


242  THK    LAW    OK    I'lDKLII  V    HOND.S. 

prayer,  iiisti-nctiii^f  tin-  jurv  to  find  for  the  dcfcridiint  on 
the  ground  tli;il  I  lie  pl.-iintill'  Inid  ollri-cd  no  evidence  legal- 
ly sufficient  lo  entitle  liini  to  recover  under  the  pleadings, 
and  judgment  was  accordingly  entered  for  the  defendant. 
Held,  that  the  judgment  should  he  aflirmed,  as  there  could 
be  no  recovery  in  this  case  for  any  acts  or  conduct  which 
falls  short  of  larceny  or  embezzlement,  and  that  the  claim 
of  the  eini)loyce  is  not  of  such  a  character  as  to  raise  a 
priiua  facie  presumption  of  dishonesty  amounting  to  lar- 
ceny or  embezzlement,  and  that  the  evidence  was  not  legal- 
ly sufficient  to  warrant  the  finding  of  a  verdict  for  the 
jilaintiff  under  the  bond. 

It  will  be  observed  that  the  bond  in  this  case,  following  the 
"usual  form  of  corporate  fidelity  bonds,  guarantees  against  loss 
by  reason  of  larceny  or  embezzlenicnt.  If  the  agent  being 
such  in  the  usual  acceptation  of  the  term,  and  not  merely  an 
employee,  being  in  legal  custody  of  the  funds  of  the  company, 
and  hence  cannot  be  convicted  of  larceny  for  misappropriat- 
ing them ;  and  having  an  interest  therein  by  way  of  commis- 
sions, cannot  under  the  authorities,  be  convicted  of  embezzle- 
ment because  of  such  interest,  it  may  be  pertinently  inquired 
under  what  circumstances  can  a  liability  arise  under  a  bond 
of  this  character  executed  on  behalf  of  an  insurance  agent? 
Its  moral  effect  upon  the  agent  is  doubtless  good.  Its  value 
to  the  insurance  company  as  a  legal  obligation  would  seem  to 
be  open  to  question. 

170. — Digest  of  Authorities. 

As  illustrative  of  the  general  subject  of  the  liability  on 
bonds  of  insurance  agents,  whether  corporate  or  otherwise, 
and  as  showing  some  of  the  questions  likely  to  arise  therein, 
particular  reference  may  be  made  to  the  following  cases : 

In  a  suit  on  the  fidelity  bond  of  a  general  agent  of  an 
insurance  company,  conditioned  that  he  would  make  month- 


INSURANCE   AGENT.  243 

\j  payments  of  all  moneys  which  he  might  receive  for  or 
owe  them,  it  was  held  the  sureties  were  liable  for  balances 
which  sub-agents  had  collected  and  not  paid  over. 

Phoenix  Mutl.  Life  Ins.  Co.  vs.  Holloway,  51  Conn. 
310. 

An  agent  of  an  insurance  company  gave  a  bond,  with 
sureties,  to  the  company,  conditioned  for  the  faithful  per- 
formance of  his  duties  as  agent,  according  to  the  by-laws 
of  the  company.  A  by-law  required  that  the  agents  of  the 
company  should  render  monthly  accounts  and  pay  each 
month  the  balance  due  the  company.  The  agent  rendered 
his  accounts  regularly,  but  one  month  did  not  pay  the 
whole  balance  due  from  him,  and  thereafter  for  more  than 
a  year  his  indebtedness  to  the  company  increased  from 
month  to  month  until  it  exceeded  the  penal  sum  in  the 
bond,  when,  for  the  first  time,  the  sureties  were  notified. 
Held,  that  these  facts  did  not  discharge  the  sureties. 

Watertown  Ins.  Co.  vs.  Simmons,  133  Mass.  85. 

Surety  on  bond  of  an  insurance  agent  is  not  liable  for  a 
premium  for  which  credit  has  been  given,  but  not  col- 
lected. 

Byrne  vs.  Aetna  Ins.  Co.,  56  111.  321. 

A  firm,  upon  being   appointed   agents   of   an   insurance 
company  of  which  a  member  thereof  had  formerly  repre- 
sented the  company,  cannot  charge  their  sureties  by  assum- 
ing liability  for  premiums  due  from  the  former  agent. 
Ball  vs.  Watertown  Ins.  Co.,  34  Mich.  137. 

Under  bond  for  faithful  performance  of  duties,  sureties 
are  not  liable  for  advances  made  to  insurance  agent. 
Burlington  Ins.  Co.  vs.  Johnson,  120  111.  622. 


244  TiiK  LAW  OF  Kii)i;i-rrv  ijonds. 

AVlu;ii  the  urtiflc's  oi'  a  iiiutual  iii.suruiicc;  coinpuny  pro- 
vide for  the  creation  of  a  fund  to  i)ay  the  expense  of  liti- 
gation, a  diversion  by  an  official  to  that  purpose  of  assess- 
ments collected  to  pay  death  losses  is  a  breach  of  the  condi- 
tions of  his  official  bond  providing  for  the  faithful  dis- 
charge of  duty. 

Sherman  vs.  ITarbin,  125  Iowa,  179. 

171. — Table  of  Cases  on  Bonds  of  Insurance  Agents. 

Aetna  Life  Ins.  Co.  vs.  Am.  Surety  Co.,  34  Fed. 

291. 
Aetna  Life  Ins.  Co.  vs.  Mabbett,  18  Wis.  667. 
Aetna  Ins.  Co.  vs.  Fowler,  108  Mich.  557. 
American  Bonding  Co.  vs.  iSTew  Amsterdam  Cas. 

Co.,  125  111  App.  33. 
Amicable    ]\Iut'l.    Ins.    Co.    vs.    Sedquick,    110 

Mass.  163. 
Arbaugh  vs.  Shockney,  34  Ind.  App.  268. 
Byrne  vs.  Aetna  Ins.  Co.,  36  111.  321. 
British  Am.  Assur.  Co.  vs.  Xeil,  76  Iowa,  645. 
Burlington  Ins.  Co.  vs.  Johnson,  120  111.  622. 
Boogher  vs.  Ins.  Co.,  103  U.  S.  90. 
Boyd  vs.  Agi-icultural  Ins.  Co.,  20  Col.  App.  28. 
Ball  vs.  Watertown  Fire  Ins.  Co.,  44  Mich.  137. 
Capital  Fire  Ins.  Co.  vs.  Watson,  76  Minn.  387. 
Conn  Mutual  Life  Ins.  Co.  vs.  Scott,  81  Ky.  540. 
Crapo  vs.  Brown,  40  Iowa.  487. 
Dwelling  House  Ins.  Co.  vs.  Johnston,  90  Mich. 

170. 
Englor  vs.  Peoples  Fire  Ins.  Co.,  46  Md.  322. 
Equitable  Life  Assur.  Soc.  vs.  Coat-s.  44  Mich. 

260. 
Foster  vs.  Franklin  Life  Ins.  Co..  72  S.  W.  Rep. 

91. 


INSURANCE   AGENT.  245 

Fidelity  Miitl.  Life  Ass'n  vs.  Dewey,  83  Minn. 

389. 
Pidelity  &  Cas.  Co.  vs.  Brown,  69  Kan.  550. 
Germania  Fire  Ins.  Co.  vs.  Herman,  193  Mass. 

67. 
Gilbert  vs.  State  Ins.  Co.  3  Kan.  App.  1. 
Guardian  Fire  Ass'n.  vs.  Thompson,   68  Calif. 

208. 
Hyatt  vs.  Grover  &  Baker  Sewing  Machine  Co., 

41  Mich.  225. 
Herbert  vs.  Lee,  118  Tenn.  133. 
Hunt  vs.  Fidelity  &  Casualty  Co.,  99  Fed.  242. 
Harper  vs.  Nat.  Life  Ins.  Co.,  56  Fed.  281. 
Hecox  vs.  Citizens  Ins.  Co.,  2  Fed.  535. 
Home  Ins.  Co.  vs.  Hoi  way,  55  Iowa,  571. 
Harrison  vs.  Lumberman,  etc.,  Ins.  Co.,  8  Mo. 

App.  37. 
Indiana  &  Ohio  Live  Stock  Ins.  Co.  vs.  Bender, 

32  Ind.  App.  287. 
Iliff  vs.  Western-Southern  Life  Ins.  Co.,  11  Cir. 

Ct.  426. 
John  Hancock  Mut.  Life  Ins.  Co.  vs.  Lowenberg, 

120  N.  Y.  44. 
Lancashire  Ins.  Co.  vs.  Callahan,  68  Minn.  277. 
Manhattan  Life  Ins.  Co.  vs.  First  Natl.  Bank, 

20  Col.  App.  529. 
Manchester  Fire  Ins.  Co.  vs.  Redfield,  69  Minn. 

10. 
National    Life    Ins.    Co.    vs.    Ohlhaber,    17    B. 

(Ohio),  353. 
New  England  Mut'l.  Life  Ins.  Co.  vs.  Randall, 

43  La.  Ann.  260. 
New  York  Life  Ins.  Co.  vs.  Hamlin,  100  Wis. 

17. 


24G  TIIK    J.AW    OF    I'lDlIJIV    IMJ.NJJS. 

A'oiihcrji  Assiir.  ( '<..  vs.  ilutcbkiss,  !J0  Wis.  415. 
jNorthwest(  i-ii   .Mut'l.    l.ilV-  In.s.  Co.  vs.  Moonej, 

108  ]^.  Y.  113. 
^Norwich    Union    Fire    Ins.    Co.    vs.    liuchalter, 

102  Mo.  App.  332. 
Pacific  Fire  Ins.  Co.  vs.  Pacific  Surety  Co.,  93 

Calif.  7. 
PahiliuG  Ins.  Co.  vs.  Crittenden,  IS  Mont.  413. 
Phcnix  Ins.  Co.  vs.  Guarantee  Co.  of  K.  A.,  115 

Fed.  964. 
Phcnix  Ins.  Co.  vs.  Findley,  59  Iowa,  591. 
Phoenix  Mut'l.  Life  Ins.  Co.  vs.  Holloway,  51 

Conn.  310. 
Portage  Co.  Ins.  Co.  vs.  "Wetmore,  17  Ohio,  330. 
River  vs.  l^ew  Hampshire  Fire  Ins.  Co.,  9  Wyo. 

81. 
Royal  Ins.  Co.  vs.  Clark,  61  Minn.  476. 
Rapp  vs.  Phoenix  Ins.  Co.,  113  HI.  380. 
Rockford  Ins.  Co.  vs.  Rogers,  15  Col.  App.  23. 
Security  Mut'l.  Life  Ins.  Co.  vs.  Aetna  Ind.  Co.. 

108  K  Y.  Supp.  171. 
Sherman  vs.  Harbin,  125  Iowa,  179. 
Spring  Garden  Ins.  Co.  vs.  Lemmon,  117  Iowa, 

69L 
Sun  Life  Ins.  Co.  vs.  Ignited  States  Fidelity  (t 

Guaranty  Co.,  130  K  C.  129. 
Taylor  vs.  Standard  Life  »S:  Accident  Ins.  Co., 

47  :N"eb.  673. 
Thompson  vs.  Commercial  Union  Assurance  Co., 

20  Col.  App.  331. 
Traders  Ins.  Co.  vs.  Hecker.  67  Minn.  106. 
Union  Central  Life  Ins.  Co.  vs.  United  States 

Fidelity  &^  Guaranty  Co.,  99  Md.  423. 
U.  S.  Life  Ins.  Co.  vs.  Salmon,  157  :N^.  Y.  682. 


INSURANCE   AGENT. 


24:7 


Watertown  Ins.  Co.  vs.  Simmons,  131  Mass.  85. 
Western  Xew  York  Life  Ins.  Co.  vs.  Clinton,  66 

N.  Y.  327. 
Williams  vs.  United  States  Fidelity  &  Guaranty 

Co.,  105  Md.  490. 


L'I8 


'J' UK  I. AW  oi'  I  nil  1,1  rv  honds. 


CHAPTER  XXIIL 


LIMITATIONS. 


172.  Provisions   relative    tliereto 

iu  cori)orate  fidelity  bonds. 

173.  I>()(trineof  Supreme  Court. 


174.     Digest  of  authorities. 
17.">.     Same. 
17t;.     Same. 


172. — Provisions  Relative  Thereto  in  Corporate  Fidelity  Bonds. 

Corporate  fidelity  bonds  usually  contain  stipulations  pro- 
viding that  claims  shall  be  made  and  proofs  of  loss  submitted 
within  a  specified  time,  for  example,  three,  six  or  nine 
months,  and  providing  further  that  no  suit  shall  be  instituted 
on  the  policy  unless  brought  within  twelve  months  next  after 
presentation  of  the  claim. 


173. — Doctrine  of  Supreme  Court. 

In  Riddlesbarger  vs.  Hartford  Fire  Ins.  Co.,  7  Wall.  386, 
the  Supreme  Court  of  the  Fnited  States  held  that  a  condi- 
tion in  a  policy  of  insurance  against  the  maintenance  of  any 
action,  to  recover  a  claim  upon  the  policy,  unless  commenced 
within  twelve  months  after  the  loss,  is  valid.  May  on  Ins., 
(4th  Ed.  1139).  And  in  Thompson  vs.  t*henix  Ins.  Co., 
136  IT.  S.  287,  the  same  Court,  citing  the  above  case,  held 
the  validity  of  such  a  stipulation  could  not  be  questioned. 
This  rule  was  recognized  and  applied  in  the  case  of  a  cor- 
porate fidelity  bond  in  California  Sav.  Bank  vs.  Am.  Sur. 
Co.,  87  Fed.  118;  also  in  Granite  Bldg.  Co.  vs.  Saville,  lOl 
Va.  217.  There  is  no  question  that  such  provisions  are  rea- 
sonable, valid  and  enforceable,  and  applicable  as  well  to 
fidelity  insurance  contracts  as  to  other  classes  of  insurance. 


LIMITATIONS.  249 

The  Court  of  Appeals  of  Kentucky  has  held  that  the  twelve 
months'  limitation  clause  is  void  as  against  public  policy,  as 
tending  to  restrict  the  jurisdiction  of  the  Courts.  Union  Cen- 
tral Life  Ins.  Co.  vs.  Spinks,  84  S.  W.  1160.  Petition  for 
review  by  Supreme  Court  dismissed  for  want  of  jurisdiction, 
209  U.  S.  539. 

174. — Digest  of  Authorities. 

For  illustration  of  the  manner  in  which  the  rule  is  applied 
to  corporate  fidelity  bonds,  reference  may  be  made  to  the  fol- 
lowing cases : 

Where  a  bond  provided  that  the  insurer  would  be  liable 
for  loss  discovered  within  six  months  from  "the  death  or 
dismissal  or  retirement  of  the  employee  from  the  service 
of  the  employer,"  held,  that  the  mere  suspension  of  a  na- 
tional bank,  and  the  taking  possession  thereof  by  an  exam- 
iner did  not  effect  the  "retirement"  of  the  cashier;  but 
where  he  actually  continued  to  render  service  he  must  be 
deemed  to  have  remaind  in  the  service  of  his  employer  at 
least  until  the  appointment  of  a  receiver  by  the  Comp- 
troller. 

Where  a  bank  suspended  business  on  the  12th  of  Novem- 
ber, and  an  examination  of  its  affairs  during  January,  Feb- 
ruary and  March  following  indicated  irregularities  in  the 
accounts  of  its  cashier,  but  the  particulars  thereof  were  not 
ascertained  until  May  and  notice  given  the  surety  by  the 
receiver  on  May  23,  and  the  cashier  remained  in  the  service 
of  the  receiver  till  March,  held,  sufficient  notice  to  prevent 
forfeiture  under  provision  requiring  notice  of  claim  within 
six  months  from  the  death,  dismissal  or  retirement  of  the 
employee  from  the  service  of  the  employer. 

The  "retirement"  of  a  national  bank  president  from  the 
service  of  the  bank  in  the  meaning  of  a  bond  of  fidelity 
insurance  is  not  effected  by  the  mere  suspension  of  the 
bank,  and  the  taking  possession  thereof  by  an  examiner; 
and  in  the  absence  of  some  other  action  he  continues  in 


J.")(l  TIIK    i.AW    01«"    KlDI.LirV     IJD.NDS. 

siU'li  service   uiilil    :it    least    a   reeeiver    is  appointtMl   by   the 
CoinptrollcM-. 

'Am.  Sur.  (\).  vs.  Pauly,  170  U.  S.  IGO.' 

Certain  corporate  fidelity  bonds,  guaranteeing  against 
the  dishonesty  of  the  officials  of  a  bank,  provided  that  any 
claim  thereunder  must  be  discovered  and  presented  during 
the  continuance  of  said  bonds  or  renewals  thereof,  or  with- 
in six  months  thereafter,  or  within  six  months  from  the 
death,  dismissal  or  retirement  of  the  officials.  The  bonds 
provided  further,  that  no  suit  shall  be  brought  thereon 
unless  the  same  is  commenced  within  twelve  months  next 
after  the  first  discovery  of  such  dishonesty.  Suit  was 
brought  on  the  bonds  on  February  1,  1895,  alleging  mis- 
appropriations of  the  bank's  funds  by  the  insured  officials 
between  April  20th,  1S93,  and  July  1st,  1893.  As  a  reason 
for  the  delay  in  bringing  suit  and  to  avoid  the  limitation 
of  the  policy,  it  was  alleged  in  tlie  declaration  that  the 
bank  suspended  payment  on  July  24th,  1893 ;  that  on 
July  26th  the  Comptroller  of  the  Currency,  by  the  bank 
examiner,  took  possession  of  all  the  books  and  assets  of  the 
bank,  and  on  August  14th  appointed  a  receiver;  that  the 
examiner  alleged  sundry  frauds  against  the  bank  officials, 
of  which  the  receiver  gave  notice  to  the  surety  company, 
but  that  the  bank  itself  did  not  and  could  not  then  dis- 
cover the  fraud;  that  imnaediately  after  the  suspension  of 
the  bank  its  officials  and  a  majority  of  its  directors  were 
arrested  and  put  under  bonds  on  criminal  charges,  whereby 
there  were  no  officials  of  the  bank  to  make  investigations 
or  institute  proceedings ;  that  on  May  21st,  1894,  the  bank 
resumed  business,  and  its  assets  were  restored  to  it  by  the 
receiver,  though  its  books  were  retained  by  the  District 
Attorney;  and  that  on  said  May  21st  the  bank  instituted 
an    investigation,    discovered    the   frauds,    and   within    12 

1. — See  Chapter  1.  see.  10.  note, 
and  Chapter  1.  see.  Hi.  ante. 


LIMITATIONS.  251 

raontlis  commenced  suit.  It  was  also  averred  that,  after 
notice  of  frauds  was  given  to  the  surety  company  by  the 
receiver,  the  company  was  also  notified  that  it  was  impos- 
sible to  give  the  full  particulars  of  the  claim  as  required  by 
the  bonds  within  three  months,  and  that  facts  were  stated 
showing  why  it  was  impossible  to  get  at  the  details  neces- 
sary to  bring  suit  within  twelve  months. 

Held  (one  judge  dissenting),  that  these  allegations  of 
the  declaration  were  sufficient  to  avoid  the  effect  of  a  fail- 
ure to  bring  suit  within  the  twelve  months'  period  of  limita- 
tion, and  that  it  was  error  to  sustain  a  demurrer  to  the 
declaration. 

Jackson  vs.  Fidelity  &  Casualty  Co.,  75  Fed.  359.^ 

175. — Same. 

A  contract  by  a  surety  company  to  indemnify  an  em- 
ployer against  loss  by  reason  of  the  dishonesty  or  culpable 
negligence  of  its  employees  limited  the  liability  of  the  com- 
pany to  such  losses  as  should  occur  during  the  continuance 
of  the  contract,  and  should  be  discovered  "during  said  con- 
tinuance, and  within  six  months  after  the  death,  dismissal 
or  retirement  of  the  employee  causing  such  loss."  Held, 
that  at  the  expiration  of  the  year  for  which  indemnity  was 
given,  the  liability  of  the  company  ceased  as  to  an  undis- 
covered loss  by  an  employee  who  still  remained  in  the  posi- 
tion to  which  his  fidelity  had  been  guaranteed,  although  he 
subsequently  died,  and  the  loss  Avas  discovered  within  six 
months  thereafter. 

Florida  Cent.  &  P.  R.  Co.  vs.  Am.  Sur.  Co.,  99  Fed. 
674.3 

The  recital  in  an  employer's  indemnity  bond,  tluit  where- 
as a  prior  bond  between  the  same  parties  had  expired,  and 

2. — See  Chapter  1,  sec.  1(J,  ante. 
3. — See  riiaptev  1,  sec.  IS,  note. 
ante. 


252  TlIK    I. AW    OF    FIDKIJ  rV     I50NDS. 

\vlii'rt'a.s  it  allowed  six  months  from  expiration  in  which 
to  make  claims  for  losses  thereunder,  the  right  of  the  em- 
ployer to  make  such  claims  within  six  months  was  recog- 
nized by  the  second  bond,  notwithstanding  any  other  pro- 
visions therein,  estops  the  employer  to  assert  that  under 
the  first  bond  he  could  recover  for  claims  presented  more 
than  six  months  after  its  expiration. 

Under  a  bond  given  an  employer  for  the  term  of  a  year 
by  which  a  company  covenants  that,  during  its  continu- 
ance, his  employee  shall  faithfully  perform  his  duties,  and 
at  the  cessation  of  said  employment  he  shall  turn  over  to 
the  employer  all  money  and  property,  and  indemnifies  the 
employer  against  loss  by  default  of  the  eniployoo  occurring 
during  the  continuance  of  the  bond,  and  discovered  during 
said  continuance,  or  within  six  months  thereafter,  or  with- 
in six  months  from  the  death,  dismissal  or  retirement  from 
the  employer's  service  of  the  employee,  recovery  can  be 
had  for  no  default  not  discovered  within  six  months  after 
the  termination  of  the  year  for  which  the  bond  was  given, 
notwithstanding  the  employee  thereafter  continued  in  the 
employment,  and  similar  bonds  were  given  from  year  to 
year. 

Lombard  Inv.  Co.  vs.  Am.  Sur.  Co.,  65  Fed.  476.^ 

A  condition  in  a  fidelity  insurance  bond  that  any  claim 
thereunder  shall  be  made  as  soon  as  practicable  after  dis- 
covery of  the  loss,  and  within  six  months  after  the  expira- 
tion of  the  bond,  is  a  material  stipulation  and  a  condition 
precedent  to  recovery  thereon. 

California  Sav.  Bank  vs.  Am.  Sur.  Co.,  87  Fed.  118. 

A  clause  in  an  indemnity  bond  limiting  the  right  to  make 
a  claim  thereunder  against  the  surety  therein  to  six  months 
after  the  default  of  the  principal,  is  reasonable  and  valid, 
and  will  be  sustained,  and  is  not  affected  by  another  clause 

4. — See  Chapter  1.  sec.  IS.  note.  ante. 


LIMITATIONS.  253 

in  tlie  bond  limiting  the  time  within  whicli  suit  may  be 
brought  to  twelve  months  after  the  discovery  of  fraud  or 
dishonesty.  One  clause  refers  to  the  intention  to  assert  a 
claim,  and  the  other  to  an  actual  suit  to  enforce  it. 

The  fact  that  accounts  are  complicated  and  a  settlement 
difficult  to  make  will  not  excuse  the  non-compliance  with  a 
clear  and  explicit  provision  in  an  indemnity  bond  that  the 
right  to  make  a  claim  thereunder  shall  cease  at  the  end  of 
six  months  from  the  death  of  the  principal  in  said  bond. 
There  is  no  rule  of  law  or  consideration  of  policy  that 
should  induce  a  Court  to  refuse  to  give  effect  to  a  stipula- 
tion of  this  kind,  which  is  reasonable  in  itself  and  founded 
on  a  valuable  consideration. 

Granite  Building  Co.  vs.  Saville,  101  Ya.  217. 

176. — Same. 

The  fact  that  an  insurer  in  a  bond  of  fidelity  insurance 
has  actual  knowledge  of  a  loss  does  not  excuse  the  insured 
from  giving  notice  thereof  within  the  time  prescribed  by 
the  conditions  of  the   bond. 

California  Sav.  Bank  vs.  Am.  Sur.  Co.,  87  Fed.  118. 

A  bank  employee's  bond,  conditioned  for  the  reimburse- 
ment of  any  loss  sustained  by  reason  of  fraud  or  dishon- 
esty in  connection  with  his  duties,  provided  that  any  claim 
under  the  bond  should  embrace  and  cover  only  acts  and  de- 
faults committed  during  its  currency  and  within  twelve 
months  next  before  the  date  of  discovery  of  the  act  or  de- 
fault upon  which  such  claim  was  based.  Held,  that  the 
bond  did  not  cover  a  default  committed  more  than  twelve 
months  prior  to  its  discovery,  which  would,  however,  have 
been  discovered  within  a  year  from  its  commission  had  not 
such  discovery  been  prevented  by  the  act  of  the  employee 
in  falsifying  the  books  during  the  year  preceding  the  dis- 
covery. 

Fidelity  &  Cas.  Co.  vs.  Consolidated  T^at.  Bank,  71 
Fed.  116. 


254  'I'lii;  I. AW  <»i''  i'ii>i:i.nv  uoxds. 

WlicTc  ;i  bank  cusliicr's  fidelity  bond,  given  March  7, 
1901,  covered  only  acts  and  defaults  committed  during  its 
currency  and  within  12  months  next  before  the  date  of  the 
discovery  of  the  act  or  default  on  which  the  chiim  was 
based,  it  did  not  cover  an  alleged  larceny  of  silver  coin 
claimed  to  have  been  deposited  May  10,  1900,  but  not  found 
in  the  bank's  vaults  when  the  cashier  absconded  in  August, 
1901,  there  being  no  evidence  as  to  when  the  same  was 
taken. 

Fidelity  &  Casualty  Co.  vs.  Bank  of  Timmonsville, 
139  Fed.  101. 

If  parties  by  their  contract  agree  that  no  suit  shall  be 
sustained  thereon  unless  commenced  within  six  months  after 
the  cause  of  action  shall  acci'ue,  such  stipulation  will  be 
binding  on  them ;  and  no  action  can  be  maintained  on  the 
contract  unless  conimenced  within  the  period  therein  lim- 
ited. 

North  Western  Ins.  Co.  vs.  Phoenix  Oil  Co.,  31  Pa. 
St.  448. 

Defendant  agreed  to  indemnify  plaintiff  for  one  year 
against  embezzlements  of  its  collector,  provided  same  were 
committed  and  discovered  within  the  year  and  reported 
within  30  days  thereafter.  Held,  that  such  stipulation  was 
a  condition  precedent  to  right  of  action  on  the  certificate, 
and  need  not  be  pleaded  as  a  defense. 

Sullivan  vs.  Fraternal  Societies'  Co.  of  Ind.  Union, 
73  N.  Y.  Supp.  1094. 

A  compensated  surety  can  only  insist  upon  forfeiture 
clauses  w^herc  the  failure  to  comply  therewith  probably 
inflicts  a  loss  on  the  surety. 

Hefferman  vs.  United  States  Fidelity  &  Guaranty 
Co.,  37  Wash.  477. 


LIMITATIONS.  255 

Further  reference  may  be  made  to  the  following  cases : 
Ins.  Co.  vs.  Downs,  13  S.  W.  (Ky.)  882. 
Kusel  vs.  Ins.  Co.,  131  Iowa,  54. 
McMullan  vs.  Winfield  B.  &  L.  Ass'n.,  64  Kan. 

298. 
Eising  vs.  Andrews,  66  Conn.  58. 
Proctor  Coal  Co.  vs.  United  States  Fidelity  & 

Guaranty  Co.,  124  Fed.  424. 


j.m; 


TiiK  I, AW  oi'  Kii>i;r,riY  iionds. 


CHAPTER  XXIV. 


CASHIER    AS    AGENT    OF    BANK. 


177.  Urdiuaiily  acts  and  state- 
lueuts  binding  on  bank. 

17S.  Cases  in  which  bank  not 
bound  by  acts  of  cashier. 

179.     Cases  holding  otherwise. 


ISO.  Payment  of  preniiiinis  im- 
portant element  in  deter- 
mining whether  bank 
bound  by  acts  of  cashier. 

181.     List  of  cases. 


177. — Ordinarily  Acts  and  Statements  Binding  on  Bank. 

The  qiie.stion  sometimes  arises  in  litigation  on  lidelity 
bonds  whether  the  cashier  of  a  bank,  in  making  representa- 
tions as  to  the  accounts  and  conduct  of  another  employee  of 
the  bank,  or  in  taking  other  action  in  connection  with  the 
procurement  of  a  bond  bj  such  employee,  or  in  subsequently 
receiving  information  material  to  the  risk,  is  the  agent  of 
the  bank,  and  his  acts  and  conduct  binding  thereon.  Ordi- 
narily it  would  seem  the  cashier  of  a  bank  occupying  the 
peculiar  position  of  that  office,  would  be  the  proper  repre- 
sentative of  a  bank  to  whom  to  make  inquires  concerning  the 
accounts  of  an  employee  for  whom  a  bond  is  proposed  to  be 
written,  and  that,  in  responding  to  such  inquiries  he  would 
be  the  agent  of  the  bank  and  his  acts  binding  on  his  princi- 
pal.^ The  authority  of  the  cashier  to  make  such  statements 
and  representations  has  generally  not  been  questioned  as  will 
appear  by  reference  to  Chapter  2,  on  ''Representations  and 
"Warranties."  True,  it  has  been  held  in  the  Pauly  Case  (170 
F.  S.  133),  that  the  president  of  a  I^ational  Bank  has  no 
power,  in  the  ordinary  course  of  business,  to  certify  to  the 


1. — As  to  duties  of  cashier  of 
bank,  when  his  acts  bind  bank, 
see  note  to  Cecil  Nat.  Bank  vs. 


Watsontown  Bank.  2n  T..  Kd.  (V 
S.I   1039. 


CASHIER  AS  AGKNT  OF  BANK.  257 

fidelity  or  integi-ity  of  a  cashier  for  the  purpose  of  enabling 
him  to  procure  a  bond  insuring  his  fidelity,  and  that  the 
bank  could  not  be  deemed  to  have  any  knowledge  of  such  cer- 
tificate (also  United  States  Fidelity  &  Guaranty  Co.  vs. 
Muir,  115  Fed.  264)  ;  yet  it  was  held  by  the  United  States 
Supreme  Court  in  the  next  corporate  surety  case  to  reach  that 
Court  (Guaranty  Co.  of  N.  A.  vs.  Mechanics  Savings  Bank 
and  Trust  Co.,  183  U.  S.  402),  that  a  bank  was  bound  by 
the  knowledge  of  its  president  as  to  speculation  of  its  teller, 
against  which  the  latter's  surety  had  provided  for  notice.- 

£78.— Cases  in  Which  Bank  Not  Bound  by  Acts  of  Cashier. 

The  acts  of  the  cashier  have  been  held  not  to  bind  the 
bank  in  the  following  cases  : 

Although  a  corporate  fidelity  bond  given  on  behalf  of 
an  employee  of  a  bank  may  have  required  the  bank,  upon 
the  discovery  of  any  fraud  or  dishonesty  on  the  part  of 
such  employee,  to  give  notice  thereof  to  the  company,  and 
also,  immediately  after  knowledge  by  the  bank  of  the  occur- 
rence of  any  act  on  his  part  involving  a  loss  to  the  com- 
pany of  more  than  $100.00  to  notify  the  company  of  the 
same;  yet  where  such  contract  contained  no  stipulation 
making  it  in  the  least  degree  incumbent  upon  the  bank 
to  exercise  any  diligence  or  care  in  inquiring  into  or  super- 
vising the  conduct  of  this  particular  employee,  or  of  any  of 
his  co-employees  in  its  service,  and  imposed  upon  it  no 
duty  vouching  for  the  fidelity  or  efficiency  of  the  latter,  or 
of  requiring  them  to  A\'atch  and  report  upon  his  actions  and 
doings,  information  or  knowledge  on  the  part  of  the  bank's 
cashier,  he  being  only  such  a  co-employee  as  to  the  matters 
concerning  which  the  company  had  stipulated  for  notice, 
would  not  be  ini])utable  to  the  bank  itself. 

The  Fidelity  &  Casualty  Co.  vs.  The  Gate  City  Nat. 
Bank,  97  Ga.  634. 

2. — See  Chapter  2,  sec.  53,  note,  ante. 

17 


258  lUK    I, AW    OK    J'IDKM'iV    I{()MJS. 

Ill  ti  suit  by  the  bank  agaiiist  the  surety  of  the  teller,  it 
is  no  defense  that  tlu;  dcfciidanl  was  induced  to  beconu; 
surety  because  of  the  false  rei)resentations  of  the  cashier, 
"that  the  (oiler's  accounts  were  all  straight;  that  there 
would  be  HO  risk  in  going  on  his  bond,  as  he  was  a  good, 
rcdiable  and  honest  man,  and  as  paying  teller  would  not 
take  anything,"  it  not  ai)j)earing  that  the  cashier  was  au- 
lliori/.cd  by  (lie  bank  to  make  any  representations  in  the 
matter,  or  that  it  was  in  the  line  of  his  duty  as  cashier. 
Such  representations  could  not  bind  the  bank,  and  the 
surety  would  take  them  at  his  own  risk  as  the  individual 
judgment  of  the  cashier. 

Lieberman  vs.  First  Xat.  Bank,  2  Penn.  (Del.)  416. 

179. — Cases  Holding  Otherwise. 

On  the  other  hand,  in  a  case  directly  involving  the  power 
of  an  assistant  cashier  of  a  bank  to  make  representations  to 
an  indemnity  company  regarding  the  accounts  of  the  presi- 
vdcnt  it  was  held : 

In  an  action  upon  contract  the  party  seeking  to 
recover  cannot  claim  the  benefits  thereunder,  and  at  the 
same  time  repudiate  the  burden.  So  the  receiver  of  a  bank 
Avill  not  be  permitted  to  repudiate  certain  statements  made 
by  the  assistant  cashier  of  a  bank  with  reference  to  the 
duties,  accounts,  &c.,  of  its  president,  upon  tbe  faith  of 
which  a  surety  company  issued  a  bond,  and  at  the  same 
time  recover  on  the  bond  for  defaults  of  the  president. 

Willoughby  vs.  Fidelity  &:  Deposit  Co.,  16  Okla.  546. 

In  Johnson  Co.  vs.  Chamberlain  Banking  House,  113  X. 
W.  1055,  it  was  held: 

The  cashier  of  a  bank  is  the  proper  officer  to  execute  a 
bond  on  its  behalf  to  secure  a  deposit  of  public  money  made 
therein,  and  the  bank  Avill  be  bound  bv  such  execution. 


CASHIEE    AS    AGENT    OF    BANK.  25i) 

180. — Payment  of  Premiums   Important  Element   in   Determining 
Whether  Bank  Bound  by  Acts  of  Cashier. 

An  important  element  in  determining  whether  the  cashier 
is  acting  for  the  bank,  is  the  payment  of  premiums  for  cor- 
porate fidelity  bonds.  It  is  apprehended  that  in  the  absence 
of  fraud  and  collusion  between  the  cashier  and  the  officer  or 
employee  whose  fidelity  is  to  be  guaranteed,  where  the  bank 
pays  the  premiums,  there  can  be  no  doubt  that  written  state- 
ments made  by  the  cashier  in  response  to  request  therefor,  in 
the  regular  course  of  the  business  of  the  bank  would  be 
binding  thereon.  Likewise  that  knowledge  of  the  cashier  ac- 
quired in  the  regular  course  of  his  duties  as  such  would  be 
the  knowledge  of  his  principal  and  he  would  in  accordance 
with  the  general  rule,  be  presumed  to  have  conveyed  it  to 
such  principal. 

181. — List  of  Cases. 

Further  reference  may  be  made  to  the  following  cases : 
Franklin  Bank  vs.  Cooper,  36  Me.  179. 
Graves  vs.  Lebanon  Bank,  10  Bush.  (Ky.)  23. 
Veazie  vs.  Williams,  8  How.  134. 
Bennett  vs.  Judson,  21  JiT.  Y.  238. 
Halden  vs.  N.  Y.  &  Erie  Bank,  72  ]^.  Y.  286. 
Elwell  vs.  Chamberlin,  31  ¥.  Y.  611. 
Story  on  Agency,  sec.  140. 


200 


llll';    l.AW    (»)•     KIDKMTV    JiO.NDS. 


CHAPTER  XXV, 


EVIDENCE. 


182.  Admissions  of  principal  and 
records  Icept  by  liim  usu- 
ally admissible  and  bind- 
ing on  surety. 


1S3.     Digest  of  authorities. 
184.     Burden  of  proof. 


182. — Admissions  of  Principal  and  Records  Kept  by  Him   Usually 
Admissible  and  Binding  on  Surety. 

It  is  of  course  not  within  the  scope  of  this  brief  work  to 
enter  upon  any  general  discussion  of  the  law  of  evidence. 
There  are  collected  here  certain  cases  referring  particularly 
to  fidelity  bonds. 

It  has  generally  been  held  that  admissions  made  by  the 
principal  concerning  the  business  in  which  he  is  engaged  in 
the  service  of  his  employer,  as  well  as  reports  made  by  him 
in  the  course  of  the  business,  and  the  books  and  records  kept 
by  him,  are  admissible  in  evidence  in  a  suit  against  the  sure- 
ties on  his  bond. 

The  admission  of  an  employee  made  when  charged  with 
fraud  and  contemporaneously  with  his  examination  of  his 
employer's  books  with  relation  to  charges  against  him  are 
binding  on  the  surety. 

Hall  vs.  United  States  Fidelity  it  Guaranty  Co.,  77 
Minn.  24. 


The  statement  of  the  treasurer  of  an  incorporated  society 
made  in  accordance  with  his  duty  and  during  the  period 
covered  by  the  bond,  but  after  his  removal  for  misconduct, 


EVIDENCE.  261 

is  competent  against  his  sureties  and  is  prima  facie  evi- 
dence of  the  facts  therein  stated. 

Father  Matthew  Y.  M.  Soc.  vs.  Fitzwilliams,  84  Mo. 
406. 

In  an  action  on  a  fidelity  bond  indemnifying  an  em- 
ployer against  loss  by  reason  of  the  dishonesty  of  an  em- 
ployee, the  testimony  of  the  employee  as  to  the  amount 
of  his  collections  under  his  employment  was  admissible. 

Supreme  Ruling  of  Fraternal  Mystic  Circle  vs.  ISTa- 
tional  Surety  Co.,  99  T^T.  Y.  Supp,  1033. 

In  an  action  upon  the  bond  of  an  employee  the  books  kept 
by  him  as  a  part  of  his  duties  during  the  period  of  service 
covered  by  the  bond  are  evidence  against  the  surety,  but 
not  so  as  to  unverified  invoices  and  books  kept  by  the  em- 
ployee before  said  period. 

Brillion  Lumber  Co.  vs.  Barnard,  131  Wis.  284. 

In  an  action  against  the  sureties  on  the  bond  of  the  sec- 
retary of  a  secret  society,  it  is  held  that  certain  admissions 
by  the  principal  on  the  bond,  although  made  subsequently 
to  the  acts  to  which  they  relate,  were  properly  admitted  to 
charge  the  sureties,  such  admissions  being  against  the  in- 
terest of  the  principal  and  he  having  since  died. 
Drabek  vs.  Grand  Lodge,  24  111.  App.  82. 

The  admission  of  a  servant,  the  principal  in  an  em- 
ployee's bond,  with  respect  to  matters  pertaining  to  the  per- 
formance of  his  guaranteed  duties,  made  while  he  is  en- 
gaged in  their  discharge,  is  always  competent  evidence 
against  the  surety  upon  his  bond. 

Guarantee  Co.  vs.  Phoenix  Ins.  Co.,  124  Fed.  170. 


2G2  THE   LAW    OF   FIDKLITY    BONUS. 

To  the  saiao  general  effect  are  the  following: 

Ca]iital  Fire  Ins.  Co.  vs.  Watson,  76  Minn.  3S7. 
Amlicrst  iiank  vs.  lioot,  43  Mass.  522. 
Guarantee  Co.  of  X.  A.  vs.  Mutual  Bldg.  &  Loan 

Ass'n.,  57  111.  App.  254. 
Goldman  vs.  Fidelity  &  Dep.  Co.,  125  Wis.  390. 
Atlas  Bank  vs.  Brownell,  9  R.  I.  168. 

The  admissions  of  a  bank  cashier  as  to  his  indebtedness 
to  the  bank  are  competent,  though  not  conclusive,  evidence 
against  the  sureties. 

McShane  vs.  Howard  Bank,  73  Md.  135. 

In  an  action  on  a  corporate  fidelity  bond,  conditioned 
to  make  good  Ipss  occasioned  by  fraud  or  dishonesty  amount- 
ing to  larceny  or  embezzlement,  entries,  receipts  and  re- 
ports made  by  the  principal  during  the  life  of  the  bond,  in 
the  ordinary  course  of  his  duty  as  treasurer,  charging  him- 
self with  certain  items,  were  not  conclusive  against  the 
surety  as  to  the  time  when  such  items  were  received. 

Supreme  Council  C.  K.  of  A.  vs.  Fidelity  <Sr  Cas- 
ualty Co.,  63  Fed.  48. 

Under  a  bond  guaranteeing  a  contract  of  agency,  decla- 
rations of  the  agent  after  the  disposition  and  conversion  of 
property  by  him  to  his  o\yn  use  held  inadmissible,  such 
declarations  having  no  direct  connection  with  his  preceding 
acts  so  as  to  bind  his  sureties. 

Lee  vs.  Brown,  21  Kan.  458. 

In  an  action  on  a  fidelity  insurance  policy  indemnifying 
an  employer  against  loss  by  reason  of  the  fraud  or  dishon- 
esty of  an  employee  amounting  to  "larceny  or  embezzle- 


EVIDENCE.  263 

ment,"  the  declarations  of  the  employee,  made  after   the 
alleged  embezzlement  are  not  binding  on  the  insurer. 

Wieder  vs.  Union  Surety  &  Guaranty  Co.,  86  ]Sr.  Y, 
Supp.  105. 

J 83. — Digest  of  Authorities. 

Following  are  cases  referring  generally  to  the  subject  of 
evidence  ou  fidelity  bonds : 

In  an  action  on  an  indemnity  bond  for  loss  due  to  the 
embezzlements  or  larcenies  of  an  agency  director  it  ap- 
peared that  no  books  were  kept  in  the  office  of  the  director, 
except  a  cash  book  prepared  by  a  cashier  in  the  director's 
employ  from  check  stubs  and  such  other  data  as  he  was 
able  to  find.  A  witness  for  plaintiff  who  investigated  the 
director's  office  detailed  the  situation  and  conversations  had 
by  him  with  the  cashier,  and  a  statement  of  loss  based  part- 
ly on  "data  secured"  from  the  cashier  was  introduced  in 
evidence.  The  indemnity  company  then  offered  the  cashier 
as  a  witness,  and  sought  to  give  his  version  of  the  conversa- 
tion with  the  plaintiff'  s  witness.  Held,  that  the  cashier's 
evidence  was  erroneously  excluded. 

Security  Mutl.  Life  Ins.  Co.  vs.  Aetna  Ind.  Co.,  108 
K  Y.  Supp.  171. 

A  report  filed  by  the  treasurer  of  a  corporation  after  the 
bond  was  executed,  in  accordance  with  his  official  duty,  and 
in  ])ursuance  of  the  laws  of  the  corporation,  was  admissible 
to  show  that  the  money  was  in  his  hands  after  the  bond  was 
executed,  but  the  sureties  could  show  the  report  was  un- 
true. 

Barry  vs.  ScreAvmen's  Ben.  Assn.,  67  Tex.  250. 

In  an  action  on  the  bond  of  a  bank  caslii(>r,  tlic  question 
of  the  scope  of  llic  antiiority  of  the  cashier  in  discounting 
paper  and  in  ])('riniltiiig  overdrafts  is  ordinarily  a  matter 


2<I4  TlIK    J, AW    OK    KIDKI-II  V     liONDH. 

of  law,  and   it    is  error  to  leave  lo  the  jiirv  the  dccisioii  of 
what  is  "williiii  the  scojie"  of  his  authority. 

Pryso  VH.   Fanners'  I'.aiik,  IT  Ky.  L.  \l.  1056. 

Whore  it  is  coneedetl  in  an  action  on  tiie  hoinl  of  a 
bank  cashier  that  eerlaiii  collateral  was  einhezzled  durint? 
the  term  covered  by  his  bond,  the  burden  is  on  the  sureties 
to  show  that  any  ])art  of  said  collateral  was  subsequently 
returned  and  ])laced  in  the  files  of  the  bank. 

Faucher  vs.  Kaneen,  .5  Ohio  Xisi  Prius,  n.  s.  614. 

Where,  in  an  action  on  plaintiff's  defaulting  cashier's 
bond  against  the  surety,  a  witness  testified  to  taking  in 
writing  the  testimony  of  the  cashier  in  his  examination  be- 
fore a  committee  of  jilaintiflF's  directors,  writing  dowTi  the 
questions  and  answers  as  they  w^ere  made,  all  of  which  were 
in  his  handwriting,  it  was  proper  to  admit  the  written 
memorandum  in  evidenc(>  as  part  of  the  testimony  of  such 
witness. 

Bank  of  Tarboro  vs.  Fidelity  k  Deposit  Co.,  128  X. 
C.  366. 

In  an  action  on  a  fidelity  bond  insuring  a  corporation 
against  loss  through  the  fraud  or  dishonesty  of  an  officer 
to  recover  a  loss  resulting  from  his  acts,  the  testimony  char- 
acterizing such  acts  necessarily  takes  a  wide  range,  and 
evidence  of  his  general  course  of  conduct  in  plaintiff's  af- 
fairs, though  not  directly  relating  to  the  transactions  in 
issue,  is  properly  admissible  to  show  the  spirit  and  intent 
which  moved  him. 

United    States    Fidelity    \-    GTiaranty   Co.    vs.    Egg 
Shippers'  Strawboard  Filler  Co.,  148  Fed.  352. 

Evidence  that  at  the  lime  of  executing  a  salesman's  bond, 
and  unknown  to  the  guarantors,  the  salesman  was  already 
largely  indebted  to  the  (Mnployer.  is  irrelevant. 

John  A.  Tolman  Co.  vs.  Butt.  116  Wis.  597. 


EVIDENCE.  265 

In  an  action  on  a  fidelity  bond,  the  testimony  of  the 
surety  that  he  would  not  have  become  such  if  he  had  known 
certain  facts  alleged  to  have  been  concealed  from  him  by 
the  person  to  whom  the  bond  was  given  is  admissible. 

Kemington  S.  M.  Co.  vs.  Kezertee,  49  Wis.  409. 

A  recovery  against  the  principal  for  his  defalcations  as 
secretary  of  an  incorporated  company  is  not  evidence 
against  the  surety  on  his  official  bond,  either  of  the  fact  of 
embezzlement  or  of  the  amount  embezzled;  but  it  would  be 
admissible,  it  seems,  in  connection  with  proof  that  it  was 
for  the  same  defaults  for  which  the  surety  was  sued,  and 
that  it  had  been  partly  paid  or  discharged. 

Firemen's  Ins.  Co.  vs.  McMillan,  29  Ala.  147. 

The  obligors  in  a  bond  are  estopped  to  deny  the  cor- 
porate existence  of  the  body  to  whom  it  was  given. 

Father  Matthew   Y.   M.   Soc.   vs.    Fitzwilliams,   84 
Mo.  406. 

Contracts  of  guaranty  will  be  liberally  construed  to  ac- 
complish the  purpose  of  indemnity  for  which  they  were 
made,  and  while  a  misrepresentation  of  a  material  fact,  in 
reliance  upon  which  the  contract  was  made,  will  avoid  the 
contract  in  equity,  irrespective  of  the  question  of  knowl- 
edge of  the  falsity  of  the  representation,  yet  the  charge  of 
false  representation  raises  a  question  of  fact,  upon  which 
the  guaranty  company  has  the  burden  of  proof. 

United  States  Fidelity  &  Guaranty  Co.  vs.   First 
l^ational  Bank  of  Dundee,  233  111.  475. 

184. — Burden  of  Proof. 

With  reference  to  the  burden  of  proof  it  may  be  said  that 
the  rule  as  laid  dowm  in  the  leading  insurance  case  of  Camp- 
bell vs.  Insurance  Co.,  98  Mass.  28,^  to  the  effect  that  the 

1. — See  Chapter  2,  see.  32,  ante. 


:;<)(>  'rill';  i,a\v  ok  i'Idkuiv   ii(;MJ.s. 

biu'deu  of  j)ruof  is  upuu  the  plainliii"  to  ])r('sent  a  case  in  all 
respects  conforming  lo  the  terms  under  which  the  risk  was 
assumed,  is  not  applicable  to  corporate  fidelity  bonds.  Under 
these  instruments,  the  burden  of  proof  is  not  upon  the  plain- 
til?  to  show  compliance  with  all  the  provisions  therein  on  his 
part  to  be  performed,  but  upon  the  defendant  to  show  the 
breach  or  non-performance  of  any  of  such  provisions. 

Sinclair  &  Co.  vs.  Natl.  Surety  Co.,  13  Iowa, 
549. 


SCOPE   OF   LIABILITY.  267 


CHAPTER  XXVL 

SCOPE    OF    LIABILITY. 

185.     Miscellaneous     Illustrations      ISO.     Same. 


of  cases  held  to  establish 
liability  on  fidelity  bonds 
and  cases  holding  other- 
wise. 


1S7.     Same. 
188.     Same. 


185. — Miscellaneous     Illustrations     of     Cases     Held    to     Establish 
Liability  on  Fidelity  Bonds  and  Cases  Holding  Otherwise. 

Under  this  title  there  are  collected,  without  any  attempt  at 
classification,  decisions  illustrating  circumstances  and  condi- 
tions which  have  been  held  to  create  liability,  and  those 
which  have  not. 

Defendant,  a  surety  company,  executed  to  plaintiff  a 
bond,  by  which  it  agreed  to  make  good  such  pecuniary  loss 
as  plaintiffs  might  sustain  during  a  certain  period  by  rea- 
son of  any  fraudulent  or  dishonest  act  of  plaintiff's  agent, 
in  connection  with  his  duties,  amounting  to  embezzlement 
or  larceny.  The  agent  paid  over  to  plaintiff  all  the  money 
collected  during  the  period  covered  by  the  bond,  but  he 
directed  a  part  of  the  same  to  be  credited  on  other  accounts 
owing  to  the  plaintiff,  without  knowledge  by  the  plaintiff 
that  the  money  collected  by  the  agent  from  certain  accounts 
was  so  applied  to  the  payment  of  other  accounts  for  which 
the  agent  was  also  liable.  Held,  that  this  action  amounted 
to  a  fraudulent  conversion  by  the  agent  of  the  money  col- 
lected, and  that  the  defendant  is  liable  therefor  under  the 
bond. 

American   Bonding   &   T.    Co.   vs.    Milwaukee   Har- 
vester Co.,  91  Md.  733. 


208  Till:    I, AW    OF    KII)KI,I1'»'     I'.OMj.S. 

A  buiRl  foiiditioiind  to  reimburse  an  employer  for  such 
pecuniary  loss  as  he  might  sustain  by  any  act  of  fraud  or 
dishonesty  amounting  to  larceny  or  embezzlement,  com- 
mitted by  a  designated  employee  in  the  performance  of  his 
duties  as  bookkeeper,  or  in  such  other  position  as  he  might 
be  called  on  to  fill,  covered  a  loss  sustained  by  the  fraudu- 
lent act  of  the  employee  in  raising  the  amounts  of  checks 
Avhich  it  was  his  duty  to  fill  out,  whether  such  duty  per- 
tained to  his  office  as  bookkeeper,  or  to  any  other  capacity 
in  his  employer's  service. 

The  fact,  though  conceded,  that  a  bank  was  liable  for  a 
loss  resulting  to  iin  ()l)ligee  in  a  fidelity  bond  through  the 
fraudulent  act  of  his  employee  in  raising  the  amount  of 
cliecks  drawn  on  the  bank,  would  not  release  such  em- 
ployee's surety  on  a  fiduciary  bond  from  liability  to  the 
obligee. 

Champion,  &;c.,  vs.  American  Bonding  k  T.  Co.,  115 
Ky.  863. 

Suit  was  brought  against  a  surety  company  on  an  in- 
demnity bond  given  to  a  fire  insurance  company  guarantee- 
ing it  against  loss  through  larceny  or  embezzlement  by  an 
agent  of  the  insurance  company.  A  breach  was  alleged  in 
the  declaration  and  a  statement  filed  claiming  that  there 
was  a  balance  due  the  insurance  company.  The  employee 
claimed  the  right  to  credits  for  returned  premiums  and  ex- 
penses in  excess  of  the  balance  against  him,  and  the  surety 
company  filed  a  bill  of  particulars,  with  one  of  its  pleas 
showing  a  balance  in  favor  of  the  employee.  At  the  close 
of  the  plaintiff's  case,  the  loAver  Court  granted  the  defend- 
ant's prayer,  instructing  the  jury  to  find  for  the  defendant 
on  the  ground  that  the  plaintiff  had  offered  no  evidence 
legally  sufficient  to  entitle  him  to  recover  under  the  plead- 
ings, and  judgment  was  accordingly  entered  for  the  de- 
fendant. Held,  that  the  judgment  should  be  affirmed,  as 
there  could  be  no  recovery  in  this  case  for  any  acts  or 
conduct  which  fell  short  of  larceny  or  embezzlement,  and 


SCOPE   OF   LIABILITY.  '  269 

that  the  claim  of  the  employee  is  not  of  such  a  character 
as  to  raise  priina  facie  presumption  of  dishonesty  amount- 
ing to  larceny  or  embezzlement,  and  that  the  evidence  was 
not  legally  sufficient  to  warraiit  the  finding  of  a  verdict  for 
the  plaintiff  under  the  bond. 

Williams  vs.  United  States  Fidelity  &  Guaranty  Co., 
105  Md.  490.1 

Where  a  contract  of  guaranty  stipulates  that  the  guaran- 
tors shall  be  liable  for  all  moneys  which  an  employer  may 
from  time  to  time  advance  to  an  employee  in  excess  of  the 
amount  due  the  latter  for  commissions,  it  must  be  shown 
to  warrant  a  judgment  against  the  guarantors  on  account 
of  moneys  advanced  that  the  advancement  was  made  in  the 
course  of  business  covered  by  the  contract  of  employment, 
and  that  proper  credits  had  been  given  the  employee  for 
commissions  earned. 

Tolman  Co.  vs.  McClure,  10  Ind.  App.  28. 

186. — Same. 

Where  the  secretary  of  a  building  association  procures 
the  issue  of  checks  of  the  association  in  the  names  of  ficti- 
tious paj^ees,  his  collection  of  such  checks  would  estop  him 
from  asserting  their  original  invalidity,  even  if  they  were 
invalid,  and  would  amount  to  embezzlement  under  section 
6843,  and  the  sureties  on  his  bond  are  liable  for  the  acts 
complained  of. 

Livingstone  vs.  The  Fidelity  &  Deposit  Co.,  7  Ohio 
Cit.  Ct.,  n.  s.  66. 

A  corporate  fidelity  bond  conditioned  that  the  surety 
"will  make  good  and  reimburse  to  the  employer  any  pecu- 
niary loss  sustained  by  him  of  money,  securities  or  other 
personal  property  in  the  possession  of  the  employee  in  the 
discharge  of  the  duties  of  his  office  amounting  to  larceny 
or   embezzlement,"    does    not    make    the    surety   liable    for 

1.— See    Chapter    22,    sec.    1(j9,  ante. 


270  TIIK    J. AW    OF    FIDKMTY    BONDS. 

iiioncy  iidviinced  by  tlic  ciiiployer  to  the  eiiiployee  to  enable 
him  to  prosecute  his  work,  expecting  him  to  be  charged 
with  it  all  ill  his  final  Hcttloment,  or  for  money  that  the 
employer  paid  to  his  cnij/loyee's  creditors,  but  is  responsible 
for  money  collected  by  the  employee  on  contracts  for  the 
employer. 

U.   S.   Fidelity  &  Guaranty  Co.  vs.   Overstreet,   27 
Ky.  L.  R.  248. 

When  the  articles  of  a  mutual  insurance  company  pro- 
vide for  the  creation  of  a  fund  to  pay  the  expenses  of  liti- 
gation, a  diversion  by  an  official  to  that  purpose  of  assess- 
ments collected  to  ])ay  death  losses  is  a  breach  of  the  condi- 
tions of  his  official  bond  ])roviding  for  the  faithful  dis- 
charge of  duty. 

Sherman  vs.  Harbin,  125  Iowa,  179. 

In  an  action  on  the  bond  of  a  bank  teller  it  was  shown 
that  the  teller  upon  being  discharged,  in  making  final  set- 
tlement of  his  accounts,  stole  from  the  drawer  of  a  clerk  in 
the  bank  a  large  svnu  of  the  bank's  money  and  paid  it  over 
to  the  cashier,  llrid.  tl!-^  sureties  on  the  bond  of  the  teller 
were  liable  for  such  theft. 

State  Bank  vs.  Welles,  20  Mass.  394. 

Sureties  on  the  bond  of  a  sewing  machine  agent  are  not 
responsible  for  his  transactions  outside  of  the  territory 
assigned  to  him  by  his  contract  with  the  company. 

White  Sewing  Moohine  Co.  vs.  Mullins,  41   Mich. 
339. 

An  agent  of  an  insurance  company  executed  a  bond  con- 
ditioned to  properly  account  for  and  pay  over  all  moneys 
and  property  of  his  principal  coming  into  his  hands  as 
such  agent  accordiuT  to  the  instructions  of  his  principal. 
He  insured  certain  property  and  issued  a  policy  which  the 
company  refused  to  accept  and  directed  him  to  cancel  it 


SCOPE   OF   LIABILITY.  271 

and  return  the  premium  to  the  insured,  which  he  promised 
to  do,  and  notified  the  company  that  he  had  done  so,  which 
was  not  true,  and  he  retained  the  premium.  The  insured 
property  was  burned  and  the  company  compelled  to  pay  the 
loss.  Held,  that  upon  such  default  the  agent's  bondsmen 
were  liable  for  the  loss  which  the  company  was  legally  com- 
pelled to  pay  the  insured. 

Koyal  Ins.  Co.  vs.  Clark,  61  Minn.  476. 

187. — Same. 

The  agent  of  an  insurance  company  is  not  bound  for  do- 
faults  of  a  cashier  appointed  by  company  to  assist  him. 
Equitable  Life  Assur.  Soc.  v.  Coats,  44  Mich.  260. 

Where  the  principal  in  a  bond  given  to  secure  the  faith- 
ful performance  of  his  duties  as  teller  of  a  bank  had,  pre- 
vious to  the  execution  of  the  bond,  taken  and  appropriated 
to  his  own  use  moneys  of  the  bank,  and  after  the  giving  of 
the  bond  had  applied  moneys  received  to  wrong  accounts, 
so  as  to  cover  up  his  defalcation.  Held,  that  the  surety  was 
not  liable  for  the  defalcation  committed  before  the  execu- 
tion of  the  bond;  and  that  for  the  mere  misapplication  of 
the  moneys  subsequently  received  to  wrong  accounts,  the 
damages  could  only  be  nominal. 

State  vs.  Atherton,  40  Mo.  209. 

Obligations 'of  an  association,  which  should  have  been 
paid  by  the  treasurer  during  his  former  term,  were  car- 
ried forward  by  him  into  his  new  term,  and  paid  out  of 
current  receipts.  Held,  that  as  such  obligations  Avere  not 
discharged  when  assessments  were  made  sufficient  to  meel 
them,  but  continued  obligations  until  paid,  their  payment 
out  of  the  funds  of  the  association  did  not  amount  to  em- 
bezzlement or  larceny  committed  during  the  new  term,  and 
the  surety  was  not  liable  for  the  misappropriation. 

Supreme  Council  Catholic  Knights  of  America  vs. 
Fidelity  &  Cas.  Co.,  63  Fed.  48. 


iJll:  lilK    I, AW    OF    l-MDKI.I  TV    HO.MjS. 

One  bccaiiic  surely  lor  the  good  conduct  of  a  cashier  of  a 
banking  coiii|iaiiy,  upon  his  rea])]iniiit  iiimt  to  that  office. 
Before  such  reapitoiulnieiit  lie  liad  been  guiUy  of  frauds 
on  tlie  coni})any;  and  afterwards,  previous  to  an  examina- 
tion by  the  directors  of  the  company  into  the  state  of  their 
cash,  he  borrowed  moneys  as  such  cashier,  wliieh  he  placed 
in  the  bank,  and  thus  concealed  his  prior  defalcation;  and 
after  such  examination  he  took  out  the  said  moneys  and 
repaid  to  those  of  Avhom  lie  had  borrowed  them.  Held,  to 
be  a  fraud  within  the  condition  of  the  bond. 

Ingraham  vs.  Maine  Bank,  13  Mass.  208. 

A  bond  executed  by  an  agent,  undertaking  that  he  will 
take  care  of  and  sell  goods  consigned  to  the  principal,  does 
not  bind  the  surety  thereon  for  goods  bought  by  the  agent 
for  the  principal. 

Thompson  vs.  Fruit  Growers'  Co.,  .')0  S.  W.  1094. 

Sureties  for  a  salesman  are  not  liable  for  advances  made 
to  him  where  he  was  to  be  compensated  by  commissions  on 
sales. 

Charles   Brown   Grocery   Co.   vs.    Wasson.    11 :]    Ky. 
414. 

Where,  during  the  life  of  his  official  bond,  the  president 
of  an  assessment  insurance  company  made  excessive  pay- 
ments to  certain  beneficiaries,  to  the  exclusion  of  others  en- 
titled to  participate  in  the  particular  fund,  he  Avas  liable 
on  his  bond  at  the  suit  of  the  receiver  of  the  association 
for  such  sum  as  was  due  the  unpaid  beneficiaries  from 
such  fund. 

Sherman  vs.  Harbin,  124  Towa.  643. ' 

i88. — Same. 

The  president  of  an  assesment  insurance  company  is 
not   liable  on  his  oflficial  bond  for  the   individual   act   of 

1. — See  Chapter  1.  sec.  17.  ante. 


SCOPE   OF   LIABILITY.  273 

the  cashier,  in  depostiiig  money  to  the  credit  of  a  fund  to 
which  it  did  not  belong. 

Sherman  vs.  Harbin,  124  Iowa,  64o. 

Where  the  bond  of  an  insurance  agent  stipulated  that 
he  should  "receive  and  forward  applications  for  and  de- 
liver policies,  and  receive  and  forward  premiums  upon  the 
same,  within  the  city  of  D.,"  and  he  received  the  premiums 
of  certain  parties  who  had  been  insured  in  D.  by  a  former 
agent  of  the  company,  but  who  had  since  removed  there- 
from. Held,  that  the  failure  to  pay  over  to  the  company 
such  receipts  was  not  a  forfeiture  of  the  bond  subjecting 
the  sureties  to  liability. 

Crapo  vs.  Brown,  40  Iowa,  487. 

In  an  action  on  a  cashier's  bond  for  damages  arising 
from  breach  thereof  by  his  misappropriation  of  money  and 
making  of  excessive  loans,  the  fact  that  the  bank  and  its 
receiver  have  sued  and  obtained  judgment  upon  notes  taken 
by  the  cashier  for  such  misappropriated  money  and  exces- 
sive loans  is  no  defense. 

Westervelt  vs.  Mohrenstecker,  76  Fed.  118. 

The  sureties  upon  the  bond  of  the  secretary  of  a  savings 
bank  are  not  liable  for  the  misappropriation  by  him  of 
moneys  belonging  to  borrowers  from  the  bank,  which  have 
been  secured  by  note  and  mortgage  to  the  bank,  and  placed 
upon  special  deposit  in  bags  marked  with  the  borrowers' 
names  and  subject  to  their  call. 

Humboldt  S.  cV  L.   Soc.  vs.  Wenncrhold,  81    Calif. 
528. 

If  money  is  received  on  deposit  by  an  iiicnrpornled  com- 
pany, without  nnthoi'ity  under  its  charter,  and  is  fraudu- 
lently embezzled  by  its  secretary,  the  surety  on  his  official 
bond  is  not  liable  for  it. 

Firemen's  Ins.  Po.  vs.  '^^c"^rillan.  20  .Ma.  147. 
IS 


i>7  I  TiiK  i,A\v  oi-  riiur.riv   I!mm,s. 


1SI>. 

From      State      to     Fedoral 

10.-.. 

Court — lie<iiiisitos. 

10(;. 

1!)0. 

niseussion      of      necessary 

107. 

facts  to  permit  removal. 

108. 

T.tl. 

1  Mirest  of  authorities. 

1!»2. 

liemoval  on  accouut  of  prej- 
tiilice  or  local  influence. 

100 

103. 

State    statutes    prohibiting 
removal. 

200 

104. 

Same — Keview    of    authori- 
ties. 

CHAPTER  XXVII. 

REMOVAL    OF    CAUSES. 

Same — Same. 

Same — Same. 

Samt! — Same. 

Discussion  of  constitution- 
ality of  such  statutes. 

Is  cause  removable  wliere 
Federal  question  involved? 

Possible  solution  of  (pies- 
tion  of  conflict  between 
States  and  Federal  (iov- 
ernment. 

189.— From  State  to  Federal  Court — Requisites. 

It  frequently  becomes  desirable,  for  reasons  which  will 
readily  siigoest  themselves  to  the  practitioner,  to  remove  a 
suit  upon  a  c<5rjx)rate  fidelity  bond  from  a  State  to  a  Federal 
Court.  To  procure  such  removal,  the  following  requisites 
must  appear: 

First.  The  suit  must  be  for  the  sufficient  jurisdictional 
amount ;  to  wit,  an  amount  exceeding  two  thousand  dollars, 
exclusive  of  interest  and  costs. 

Secoiid.  The  defendant  must  bo  a  foreign  corporation. 

Third.  The  suit  must  be  against  the  insuring  company 
alone,  or  if  the  'Vmj.loyoe''  or  "risk,"  being  a  citizen  of  the 
State  in  which  the  suit  is  instituted,  is  made  a  party  defend- 
ant, the  defendant  corporation  must  cause  his  name  to  be 
stricken  out  by  proper  procedure,  where  the  controversy  i- 


REMOVAL   OP    CAUSES. 


27i 


separable,  and  such  party,  although  denominated  a  ''princi- 
pal"' therein,  has  not  become  such  in  law  by  joining  in  the 
obligation  in  favor  of  the  insured. 

FourtJi.  The  existence  of  prejudice  or  local  influence  which 
would  prevent  the  defendant  from  obtaining  justice  in  the 
State  Court. 

Fifth.  The  absence  of  prohibition  of  such  removal  by  the 
statjites  of  the  State^  in  which  the  suit  is  instituted. 

190. — Discussion  of  Necessary  Facts  to  Permit  Removal. 

1.  ]S[othing  further  need  be  here  said  relative  to  the  juris- 
dictional amount  necessary  to  authorize  the  removal  of  a 
cause  from  a  State  to  a  Federal  Court. 


1. — Compliance  icith  State  Stat- 
utes hi)  Foreign  Surety  Company 
as  Affecting  Validity  of  Bonds 
Executed  by  It — A  surety  bond 
taken  as  security  for  the  conduct 
of  an  agent  of  a  foreign  corpora- 
tion wliicli  undertakes  to  do  busi-  1 
ness  in  Pennsylvania  without  com- 
plying with  the  requirements  of 
the  second  section  of  Act  of  April 
22,  1874,  providing  that  a  state- 
ment showing  the  title  and  ob- 
ject of  the  corporation,  the  loca- 
tion of  its  offices,  the  names  of  its 
agents,  etc.,  shall  be  filed  in  the 
office  of  the  secretary  of  the 
Commonwealth,  is  invalid.  Mc- 
Canna  &  Fraser  Co.  vs.  Citizens' 
T.  &  Surety  Co.,  76  Fed.  420,  fol- 
lowing Thom  vs.  Ins.  Co.,  80  Pa. 
St.  1.5,  and  Johnson  vs.  Hulings, 
103  Pa.  St.  498.  and  affirming  74  ; 
Fed.  .'i07.  See  also  Pitts.  Cons't.  | 
Co.  vs.  West  Side  Belt  R.  R.  Co.,  | 
151  Fed.  125. 


It  was  held  in  Iowa  Lillooet 
Gold  Mining  Co.,  Ltd.,  vs.  United 
States  Fidelity  &  Guaranty  Co., 
14G  Fed.  437,  that  a  statute  of 
Iowa,  similar  to  that  of  Penn- 
sylvania, was  not  intended  to 
render  void  the  contracts  of  such 
a  foreign  corporation  before  it  had 
complied  with  its  provisions;  and 
hence,  that  a  fidelity  bond  exe- 
cuted by  a  surety  company  for 
its  secretary  was  valid.  To  the 
same  effect  is  Spreyne  vs.  Gar- 
field Lodge.  117  111.  Apix  253.  In 
Groton  Bridge  Co.  vs.  American 
Bridge  Co..  1.51  Fed.  87L  held  a 
foreign  corporation  may  main- 
tain an  action  in  a  Federal  Court 
to  enforce  a  contract  made  in 
New  York,  although  it  has  not 
complied  with  the  laws  of  New 
York. 


27(1  TJIK    LAW    Ol'    IIDKLIIV    UO.NDS. 

J.  Sttv  to  llic  I'licl  lliat  llic  (lcrcii<lant  corporatitjii  luu.st  be 
II  citizen  of  a  State  other  than  that  in  which  the  suit  is  file^l 

to  ciilitlc  it   to  remove  <^»n  the  iiroiiiid  <pt'  ilixcrsity  of  eitizcn- 
shij/. 

3.  If"  the  action  is  instituted  aizaints  the  insni'ini::  company 
only,  which  is  the  ])roi)cr  j)ractice,  the  defenchint  has  the  right, 
under  the  Federal  Constitution  and  Acts  of  Congi'ess,  to  re- 
move the  case  to  a  Federal  Court,  subject  to  the  restrictions 
here  sho%\Ti. 

Most  corporate  fidelity  bonds  are  r((|uired  To  be  sipied  by 
the  "employee"  or  "i-isk,"  who  thereby  ^-ives  his  assent  to  the 
execution  of  such  instniment,  and  fuithermore  obligates  him- 
self by  an  appropriate  provision  inserted  in  the  instrument 
to  reimburse  and  save  harmless  the  surety  for  any  loss  which 
it  may  sustain  liy  reason  of  the  execution  of  such  suretyship. 
AMiile  the  so-called  principal  is  thus  required  to  sign  the  obli- 
gation, he  is  not  a  ])ro]ier  ]>arty  defendant  to  a  suit  on  the 
bond. 

It  most  frequently  happens  in  practice,  however,  that  the 
.  principal  is  joined  with  the  surety  as  a  party  defendant.  In 
such  case  the  proper  practice  is  for  the  surety  to  have  the 
name  of  the  principal  stricken  out  by  appro])riate  procedure, 
and  then  to  petition  for  removal  as  though  the  case  had  origi- 
nally been  brought  against  the  surety  alone.  Care  must  be 
taken  to  bring  the  case  within  the  requirements  of  the  Act  of 
Congress  of  xVugust  13,  1888,  Ch.  86G,  as  laid  down  by  the 
Supreme  Court  in  Goldey  vs.  ^Morning  Xews,  150  V.  S.  524. 
that  the  petition  for  removal  and  bond  must  be  filed  "at  the 
time,  or  at  any  time  before,  the  defendant  is  required  by  the 
laws  of  the  State,  or  the  nile  of  the  State  Coxrt  in  which 
such  suit  is  brought,  to  answer  or  plead  to  the  declaration  or 
com]daint  of  the  plaintiff.'' 


REMOVAL    OF    CAUSES.  277 

191. — Digest  of  Authorities. 

The  employee  does  not  join  in  such  bonds  for  the  pur- 
pose of  binding  himself  to  the  employer,  but  solely  for  the 
purpose  of  obligating  himself  to  the  indemnitor. 
Brandt,  Sur.  k  Guar.,  sec.  1,  2  and  5. 

When  in  a  bond  by  which  a  surety  company  agrees  to 
indemnify  an  employer  against  loss  arising  from  the  defal- 
cation of  an  employee,  the  latter  united  for  the  purpose 
of  assenting  to  the  terms  of  the  bond  and  of  covenanting 
to  indemnify  the  surety  company,  such  a  bond  is  not  a 
joint  obligation,  and  an  action  on  it  lies  against  the  surety 
company  alone,  without  the  joinder  of  the  employee. 

American  Bonding  &  T.   Co.   vs.   Milwaukee   Har- 
vester Co.,  91  Md.  733. 

Where  the  principal  joins  in  a  corporate  fidelity  bond 
for  the  purpose  of  entering  into  an  obligation  to  the  surety 
the  liability  is  not  joint. 

Guarantee    Co.    of   N.    A.    vs.    Mechanics'    Savings 
Bank  &  Trust  Co.,  183  IT.  S.  402. 

Where  the  principal  joins  in  a  corporate  fidelity  bond 
merely  to  enter  into  an  obligation  to  save  the  company 
harmless,  and  makes  no  promise  or  covenant  to  the  ob- 
ligee, the  company  and  the  treasurer  are  not  jointly  liable 
on  such  bond. 

Mayor,  &c.,  vs.  Harvey,  114  Ga.  733. 

In  a  suit  on  the  corporate  fidelity  bond  of  a  bank  officer, 
on  which  the  surety  was  a  foreign  corporation  and  the  prin- 
cipal was  serving  a  term  of  imprisonment  in  another  State, 
a  petition  was  made  by  the  surety  for  the  removal  of  the 
case  to  a  Federal  Court. 

Held,  the  obligation  was  a  joint  and  several  one,  and  the 
principal  a  proper  party  to  the  suit;  that  the  controversy 


278  Till':  J, AW  OF  I'lDi.r.rrY  Mo.xn.s. 

was  not  a  S('i)arablo  one,  and  lience  there  could  be  no  re- 
moval. 

Guarantee  Co.  vs.  First  National  Bank  of  Lynch- 
burg, 95  Va.  480. 

Tho  last  nienlioned  ease  is  apparently  in  conflict  with  the 
text,  but  not  actually  so  inasmuch  as  the  obligation  sued  on 
was  not  the  usual  form  of  corporate  fidelity  bond  above  re- 
ferred to,  but  was  a  joint  obligation  of  the  principal  and 
surety.  Of  course  in  such  case  where  the  employee  joines  as 
principal  with  the  surety  in  the  obligation  to  the  obligee,  he 
is  a  nocossarv  ])arty  defendant,  the  cause  is  not  a  separable 
one,  and  is  not  removable  on  the  ground  of  diversity  of  citi- 
zenship. 

192. — Removal  for  Account  of  Prejudice  or  Local  Influence. 

4.  The  instances  in  which  a  foreign  surety  company  could 
procure  the  removal  of  a  cause  on  the  ground  of  the  existence 
of  prejudice  or  local  inti^uencc  are  not  sufficiently  numerous  in 
practice  to  require  special  consideration  here.  The  jurisdic- 
tional amount  is  the  same  as  in  the  case  of  removal  on  the 
ground  of  diversity  of  citizenship.  In  re  Pennsylvania  Co., 
137  I".  S.  451,  and  the  Circuit  Court  must  be  legally  satisfied, 
by  proof  suitable  to  the  nature  of  the  case,  of  the  truth  of  the 
allegation  that  by  reason  of  prejudice  or  local  influence  the 
defendant  will  not  be  able  to  obtain  justice  in  the  State 
Court.     Thid. 

Although  the  instances  are  infrequent,  it  sometimes  be- 
comes highly  important,  in  the  view  of  a  defendant  corporate 
surety  to  remove,  because  of  the  existence  of  local  influences 
supposed  to  be  hostile  to  its  interests  and  such  as  to  prevent  a 
fair  and  impartial  trial  of  the  question?  involved,  an  action 
pending  against  it  to  a  Federal  Court.  . 


REMOVAL    OP    CAUSES.  279 

A  somewhat  curious  recent  case  furnishes  apt  illustration 
of  the  point.  A  public  official  reported  the  loss  of  a  large 
sum  of  public  funds,  alleging  that  he  had  been  overpowered, 
bound  and  robbed.  The  law  of  the  State  providing  no  relief 
to  the  official  or  his  sureties  in  such  case,  the  loss  must  fall 
on  a  burglaiy  policy  issued  by  a  foreign  surety  corporation, 
if  the  official's  declarations  could  be  substantiated,  or  upon 
his  official  bond,  sigiied  by  about  fifteen  more  or  less  promi- 
nent individuals  distributed  throughout  the  agricultural 
county  in  which  he  resided,  if  recovery  could  not  be  had  upon 
the  burglary  policy.  Obviously,  in  such  case,  in  a  conflict  be- 
tween the  interests  of  a  foreign  corporation  on  the  one  hand, 
and  those  of  numerous  resident  uncompensated  individual 
sureties  on  the  other,  a  local  jury  would  be  calculated  to  give 
the  benefit  of  any  doubt  to  the  latter.  And,  hence,  to  secure 
a  fair  and  impartial  trial,  such  a  case  should  be  removed 
away  from  such  controlling  influences  to  the  Federal  Court 
for  the  District,  but  here  the  corporate  defendant  is  met  with 
the  State's  prohibition  against  such  removal,  under  penalty 
of  forfeiture,  referred  to  under  the  5th  sub-title  of  this 
Chaj)ter.    . 

193. — State  Statutes  Prohibiting  Removal. 

5.  Many  of  the  States  have  enacted  laws  the  intent  and 
purpose  of  which  is  to  prevent  the  removal  from  the  Courts 
of  such  States  to  the  Federal  Courts  of  suits  ))y  or  against 
foreign  corporations,  and  partieuhii'ly  foreign  insurance  cor- 
y)orations.  The  earlier  of  such  statutes  too]<  the  form  of  re- 
quiring the  foreigii  cor])oration,  when  applying  for  pennis- 
sion  to  do  business  in  the  State,  to  agree  in  advance  not  to 
remove  suits  against  it  fi-o)u  the  State  Coui'ts.  Aflcr  the  Su- 
preme Court  had  held  that  a  statute  requiring  such  agreeuicMit 
was  unconstitutional,  as  will  be  hereafter  shown,  the  snbsc- 
qnent  statutes  pi'o\i(l('(l  (lint  if  such  foreign  corpoi'atioii  did  so 


liSO  'llIK    l,A\V    OK    1   HUM  IV     l;(».M^.S. 

rfiiio\('  ;i  ciiiisi-  or  lilc  a   pciitiun   i<>  do  so  its  license  to  do 
hiisiiiess  within  I  Ik;  State  should  be  revoked. 

194. — Same — Review   of   Authorities. 

A  statute  of  the  State  of  Wisconsin,  })ass('d  in  1870,  en- 
acted as  follows : 

"That  any  firo  insurance  conipanv,  association,  or  part- 
nerslii]),  incorporated  by  or  organized  under  the  laws  of 
any  other  State  of  tlif  United  States,  desiring  to  transact 
any  such  business  as  aforesaid  by  any  agent  or  agents,  in 
this  State,  shall  first  appoint  an  attoniey  in  this  State  on 
whom  process  of  law  can  be  served,  containing  an  agree- 
ment that  such  company  will  not  remove  the  suit  for  trial 
into  the  United  States  Circuit  Court  or  Federal  Courts, 
and  file  in  the  office  of  the  Secretary  of  State  a  written 
instrument  duly  signed  and  sealed,  certifying  such  appoint- 
ment, which  shall  continue  until  another  attorney  be  sub- 
stituted." 

In  Insurance  Company  vs.  Morse,  20  Wall.  445  (1874\ 
the  Supremo  Court  of  the  United  States,  (two  justices  dis- 
senting) in  ccmstrning  this  statute  held :  , 

The  Constitution  of  the  United  States  secures  to  citizens 
of  another  State  than  that  in  which  suit  is  brought  an 
absolute  right  to  remove  their  cases  into  the  Federal  Court, 
upon  compliance  with  the  terms  of  the  twelfth  section  of 
the  Judiciary  Act.  The  obstruction  of  this  right  by  the 
statute  above  quoted  is  repugnant  to  the  Constitution  of 
the  United  States  and  the  laws  in  ]mrsuance  thereof,  and 
is  illegal  and  void. 

The  agreement  of  the  insurance  com]ianv,  filed  in  pur- 
suance of  the  Act,  derives  no  su])]>ort  from  a  statute  thus 
unconstitutional,  and  is  as  void  as  it  would  be  had  no  such 
statute  been   passed. 


REMOVAL   OF   CAUSES.  281 

195. — Same — Same. 

In  Doyle  vs.  Continental  Ins.  Co.,  94  U.  S.  535  (1876), 
the  same  legislation  of  the  State  of  Wisconsin  was  before  the 
Supreme  Court.  It  was  shown  that  subsequent  to  the  deci- 
sion in  the  Morse  Case,  the  Continental  Insurance  Company 
removed  a  suit  brought  against  it  in  the  State  Court,  into  the 
Federal  Court.  That  because  of  such  removal,  a  demand  was 
made  on  the  secretary  of  State  to  revoke  the  certificate  or 
license  of  the  company  to  do  business  in  the  State.  A  temp- 
orary injunction  was  issued  restraining  the  defendant  from 
revoking  the  license  because  of  said  removal.  A  demurrer  to 
the  bill  was  oveiTuled,  and  a  decree  entered  making  the  in- 
junction pei'petual.  Upon  appeal,  the  Supreme  Court  (three 
justices  dissenting)  held : 

The  Court  reaffirais  the  decision  in  Insurance  Co.  vs. 
Morse,  20  Wall.  445,  that  an  agreement  to  abstain  in  all 
cases  from  resorting  to  the  Courts  of  the  United  States  is 
void  as  against  public  policy,  and  that  a  statute  of  Wiscon- 
sin requiring  such  an  agreement,  is  in  conflict  with  the 
Constitution  of  the  United  States. 

A  State  has  the  right  to  impose  conditions,  not  in  con- 
flict with  the  Constitution  or  the  laws  of  the  United  States, 
to  the  transaction  of  business  within  its  territory  by  an 
insurance  company  chartered  by  another  State,  or  to  ex- 
clude such  company  from  its  territory,  or,  having  given  a 
license,  to  revoke  it,  with  or  without  cause. 

The  Legislature  of  Wisconsin  enacted  that  if  any  for- 
eign insurance  company  transferred  a  suit  brought  against 
it  from  the  State  Courts  to  the  Federal  Courts,  the  Secre- 
tary of  State  should  revoke  and  cancel  its  license  to  do 
business  within  the  State.  An  injunction  to  restrain  him 
from  so  doing,  because  such  a  transfer  is  made,  cannot  be 
sustained.  The  suggestion  that  the  intent  of  the  Legisla- 
ture is  to  accomplish  an  illegal  result,  to  wit,  the  preven- 
tion of  a  resort  to  the  Federal  Courts,  is  not  accurate.   The 


2S2  TIIK    1,A\V    OF    KIDKLITV    U(JMjS. 

etlect  of  this  decision  is  that  the  conipany  must  forego 
such  resort,  or  cease  its  business  in  the  State.  The  latter 
result  is  here  accomplished. 

As  the  State  lias  the  right  to  exclude  such  company,  the 
means  by  Avhich  she  causes  such  exclusion,  or  the  motives 
of  her  action,  are  not  the  subject  of  judicial  inquiry.  No 
right  of  the  complainant  under  the  laws  or  Constitution 
of  the  United  States,  by  its  exclusion  from  the  State,  is  in- 
fringed. 

1 96. — Same — Same. 

In  Barron  vs.  Burnside,  121  U.  S.  186  (1887).  the  Su- 
preme Court  held: 

The  statute  of  Iowa,  approved  April  6,  18s6,  which  re- 
quires that  every  foreign  corporation  named  in  it  shall,  as 
a  condition  of  obtaining  a  permit  for  the  transaction  of 
business  in  Iowa,  stipulate  that  it  will  not  remove  into  the 
Federal  Court  certain  suits  which  it  would,  by  the  laws 
of  the  United  States,  have  a  right  to  remove,  is  void,  be- 
cause it  makes  the  right  to  a  permit  dependent  upon  the 
surrender  by  the  foreign  corporation  of  a  privilege  secured 
to  it  by  the  Constitution  and  the  laws  of  the  United  States. 

The  case  of  Home  Ins.  Co.  vs.  Morse,  20  Wall.  445.  ap- 
proved ;  and  the  decision  in  Doyle  vs.  Continental  Ins.  Co., 
94  U.  S.  535,  explained. 
The  Court  says: 

"The  case  of  Doyle  vs.  Continental  his.  Co.,  94  U.  S. 
535,  is  relied  on  by  the  defendant  in  error.  In  that  case, 
this  Court  said,  that  it  had  carefully  reviewed  its  decision 
in  Insurance  Co.  vs.  Morse,  and  was  satisfied  with  it.  In 
referring  to  the  second  conclusion  in  Insurance  Co.  vs. 
Morse,  above  recited,  namely,  that  the  statute  of  Wisconsin 
was  repugnant  to  the  Constitution  of  the  United  States,  and 
was  illegal  and  void,  the  Court  said,  in  Doyle  vs.  Conti- 
nental Ins.  Co..  that  it  referred  to  that  portion  of  the  stat- 


EEMOVAL  OF  CAUSl:S.  283 

ute  wliicli  required  a  stipulation  not  to  transfer  causes  to 
the  Courts  of  the  United  States.  *  *  *  The  point  of  the 
decision  seems  to  have  been,  that,  as  the  State  had  granted 
the  license,  its  officers  would  not  be  restrained  by  injunc- 
tion, by  a  Court  of  the  United  States,  from  withdrawing  it. 
All  that  there  is  in  the  case  beyond  this,  and  all  that  is  said 
in  the  opinion  which  appears  to  be  in  conflict  with  the 
adjudication  in  Insurance  Co.  vs.  Morse,  must  be  regarded 
as  not  in  judgment." 

197. — Same — Same. 

In  Security  Mutual  Life  Ins.  Co.  vs.  Prewitt,  202  U.  S. 
246  (1906),  a  statute  passed  by  the  State  of  Kentucky  was 
before  the  Supreme  Court,  which  held  (Mr.  Justice  Day  and 
Mr.  Justice  Harlan  dissenting)  as  follows: 

A  State  has  the  power  to  prevent  a  foreign  corporation 
from  doing  business  at  all  within  its  borders  unless  such 
prohibition  is  so  conditioned  as  to  violate  the  Federal  Con- 
stitution, and  a  State  statute  which,  without  requiring  a 
foreign  insurance  company  to  enter  into  any  agreement  not 
to  remove  into  the  Federal  Courts  cases  commenced  against 
it  in  the  State  Courts,  provides  that  if  the  company  does 
so  remove  such  a  case  its  license  to  do  business  within  the 
State  shall  thereupon  be  revoked,  is  not  unconstitutional. 

Doyle  vs.  Continental  Tns.  Co.,  94  U.  S.  535,  followed, 
and  held  not  to  be  overruled  by  Barron  vs.  Burnsido,  121 
U.  S.  1S6,  or  any  othoi'  decision  of  this  Court. 

Mr.  Justice  Peckham  in  delivering  the  opinion  of  the 
Court  reviewed  the  decisions  in  the  Morse  and  Doyle  Cases, 
and  said: 

"Tn  these  two  cases  this  Court  decided  tliat  any  agree- 
ment made  by  a  foreign  insurance  company  not  to  remove  a 
cause  to  the  Federal  Court  was  void,  whether  made  pursu- 
ant to  a  statute  of  the  State  providing  for  such  agreement. 


284  Tin:    LAW    OF    |-ll)i;i.I  TV    ISd.NDS. 

tir  ill  llic  nhsciicc  ol"  siicli  st;ilulc;  l)iit  tliat  the  Stati;  hav- 
ing; power  to  cxcIikIc  altof^ctlicr  a  forcif^ii  insurance  coin- 
|)nii_v  fi-oiii  doing  business  witliin  the  State,  luul  ])Ower  to 
enact  a  statute  wliieli,  in  addition  to  i)roviding  for  the 
agreement  mentioned,  also  provided  that  if  the  company  did 
remove  a  ease  from  the  State  to  a  Federal  Court,  its  right 
to  do  business  Avithin  the  State  should  cease,  and  its  jjcr- 
mit  should  be  revoked.  It  was  held  there  was  a  distinction 
between  the  two  ])ropositions,  and  one  might  be  held  void 
and  the  other  not.  The  case  of  Barron  vs.  Burnside,  121 
U.  S.  186,  has  been  cited  as  overruling  the  Doyle  Case, 
and  as  holding  that  a  statute  of  the  nature  of  the  one  in 
question  here  void  as  a  violation  of  the  Federal  Constitu- 
tion. *  *  *  We  do  not  think  so.  *  *  *  The  most  that  can 
be  contended  for  is  that  the  Barron  Case  holds  that  where 
the  statute  exacts  a  stipulation  in  advance,  as  a  condition 
of  granting  a  permit,  and  the  statute  is  not  separable  into 
parts,  the  whole  statute  is  void,  and  a  provision  for  with- 
drawing the  permit,  if  a  case  is  removed,  is  not  saved. 
That  principle,  as  we  have  said,  does  not  touch  this  case, 
as  there  is  no  exaction  of  a  stipulation  at  any  time.  *  *  * 
The  truth  is  that  the  effect  of  the  statute  is  simply  to  place 
foreign  insurance  companies  upon  a  par  with  the  domestic 
ones  doing  business  in  Kentucky.  ]^o  stipulation  or  agree- 
ment being  required  as  a  condition  for  coming  into  the 
State  and  obtaining  a  permit  to  do  business  therein,  the 
mere  enactment  of  a  statute  which,  in  substance,  says  if  you 
choose  to  exercise  your  right  to  remove  a  case  into  a  Fed- 
eral Court,  yoiir  right  to  further  do  business  within  the 
State  shall  cease  and  your  ]iermit  shall  be  withdrawn,  is 
not  open  to  nnj/  constitutional  ohjection." 

198. — Discussion  of  Constitutionality  of  Such  Statutes. 

The  question  havine:  been  squarely  presented  to  the  Court, 
and  having  been  twice  argued  by  distinguished  counsel,  it  is 
settled,  at  least  for  the  present,  that  State  statutes  providing 
for  the  revocation  of  the  permit  of  a  foreign  insurance  cor- 


REMOVAL   OF   CAUSES.  285 

poration  upon  its  removing  a  case  from  the  State  to  a  Federal 
Court  are  constitutional,  whatever  may  be  the  views  of  the 
2:)rofession. 

Since  the  Frewitt  decision,  however,  the  State  of  Missouri 
has  passed  two  Acts,  incorporating  with  a  few  minor  excep- 
tions, the  langTiage  of  the  Kentucky  statute,  upon  which  it 
was  based,  making  one  Act  applicable  to  foreign  insurance, 
including  surety,  companies,  and  the  other  applicable  to  rail- 
way corporations  incorporated  elsewhere  than  in  that  State, 
and  adding  to  the  latter  Act  a  penalty  of  from  two  to  ten 
thousand  dollars  for  continuing  the  business  of  passenger  and 
freight  transportation  within  the  State  after  a  revocation  of 
their  right  to  do  business  within  the  State,  as  provided  by  the 
Act.  Certain  railway  corporations  applied  to  the  United 
States  Circuit  Court  at  Kansas  City,  Missouri,  for  an  injunc- 
tion to  restrain  the  Secretary  of  State  from  enforcing  the  said 
law  providing  for  the  revocation  of  their  respective  charters- 

The  Court  granted  the  injunction,  holding  the  Statute  un- 
constitutional, upon  the  authority  of  Barron  vs.  Bumside, 
supra,  and  upon  the  gi'ound  that  it  is  in  conflict  with  the 
Federal  constitution,  being  ropug-nant  to  the  provision  against 
the  passage  of  any  law  by  a  State  impairing  the  obligations 
of  contracts ;  that  the  statute  would  result  not  only  in  an  im- 
pairment, but  a  repudiation  of  the  contract  under  which  the 
foreign  railway  coi*poratious  entered  the  State ;  that  the  en- 
forcement of  the  Act  would  amount  to  confiscation  and  a])- 
propriation  by  the  State  of  the  property  of  such  coi-porations  ; 
and  upon  the  further  ground  that  a  resident  corporation  may 
sue  in  the  Federal  Court,  if  there  is  a  Federal  question, 
while  that  right,  as  well  as  that  of  removal,  is  denied  to  a 
non-resident  company — rights  which  are  given  by  the  Con- 
stitution and  Acts  of  Congress. 


2S0  'I'lll';     LAW    i)h'    1-\1>\:IAI\    J{(^M)S. 

Obviously  (licru  is  a  disLinction  between  a  railroad  corpora- 
tion, o])oratiii,ii-  nndor  the  Iciiislative  authority  of  the  State 
and    owniiii:,-    hinds    nnd    raili-oad    ]»roperty    tlierein,   ^nd    an 
insurance  company,  operating  under  the  permit  of  its  Insur- 
ance J)cpartment,  revocabh>  with  or  without  cause,  as  said 
by  the  Supreme  CV>urt  in  Doyle  vs.  Ins.  Co.,  supra.    And  the 
revocation  of  the  i)ormit  of  the  hitter  could  be  effected  with 
the  loss  of  its  business  in  the  State,  while  the  enforcement  of 
the  penalty  of  the  statute  against  a   railroad   coi7)oration, 
would  result,  as  the  Court  said  in  the  recent  case  refeiTed  to 
in  the  confiscation  of  its  property.     But  the  results  to  follow 
the  enforcement  of  a  law  are  not  the  measure  of  its  constitu- 
tionality.    The  entire  statute  therefore,  it  would  seem,  must 
be  constitutional  or  not.    Doubtless  the  question,  as  presented 
in  the  recent  Missouri  Case,  will  reach  the  Supreme  Court. 

199. — Is  Cause  Removable  Where  Federal  Question  Involved? 

It  has  been  held  that  a  suit  on  the  official  bond  of  the 
cashier  of  a  national  bank,  conditioned  for  the  faithful  per- 
formance of  the  duties  thereof  "according  to  law  and  the  by- 
laws" of  the  bank,  involves  a  federal  question,  and  is  main- 
tainable in  a  Federal  Court,  irrespective  of  the  citizenship 
of  the  parties.  Walker  vs.  Windsor  National  Bank,  56  Fed. 
7C).  Anothei-  inipoi'tant  question  is  here  presented:  Will  it 
still  be  held,  in  such  case,  that  a  foreign  surety  corporation, 
upon  removing  a  suit  against  it  to  a  Federal  Court,  will  in- 
cur the  forefiture  of  its  charter?  Apparently  so,  under  the 
Prewitt  decision,  although  it  has  been  held  that  any  attempt 
by  a  State  to  define  the  duties  of  National  Banks  or  to  con- 
trol the  conduct  of  their  afi^airs  is  absolutely  void. 
McClellan  vs.  Chipman,  164  U.  S.  347. 


REMOVAL   OF   CAUSES.  287 

200. — Possible  Solution   of  Question   of   Conflict  Between   States 
and   Federal   Government. 

The  whole  question  of  conflict  of  authority  between  the 
Federal  Government  and  the  several  States,  of  which  this  is 
a  feature,  will  doubtless  find  solution  in  the  assumption  by 
the  Government  of  control  of  all  insurance  and  surety  cor 
jDorations  engaged  in  an  interstate  business. 


INDEX. 

PAGIC 

ACCOUNTS. 

examination   of   employee's 42 

illustration • 43 

promissory  warranty  as  to  examination  of 45 

ADMISSIONS. 

(See  Evidence.) 
AGENT. 

insurance,  bonds  of 241 

discussion 241 

di,2;est  of  authorities 242 

table  of  cases 244 

not  liable  for  agency  balances 241,  268 

liability    for    aij;enfs    failure    to    cancel    insurance 

policy 270 

not  liable  for  defaults  of  cashier 271 

failure  of,  to  pay  over  premiums  received  from  pre- 
decessor     273 

sewing  machine,  transactions  out  of  territory 270 

alteration  of  contract  or  territory  of 175 

ALTERATION. 

of  contract. 

(see  Contract.) 
APPLICATION, 
for  bond. 

representations  and  warranties  in 33 

statements  concerning  by  officer  of  corporation....     GO 

statements   concerning   l>y   applicant 54 

agreement  in  to  reimburse  surety 210 

of  payments,  chapter  on 1  r>7 

in  course  of  business 157 

digest  of  authorities 157 

of  salvage,  chapter  on 152 

digest  of  authorities 152 

discussion 155 

ARREST. 

information  for,  requirement  of  by  surety 140 

19 


21)0  INDEX. 

I'AOK 

AUTIIOKITV. 

ol'  oUiciu"  ol'  corporal  ion    in   iiuliiiit,'  statcnicnls  as  pait    of 

apiilii-atioii   Tor  oniployi-c's   boiid d'j 

AUTHOKITIIOS. 

(iS'ccDiGEST  or  AtTiiourriES. ) 

BANK. 

authority  of  oflicer  of,   in   making   statements  as  part   of 

applicatiou  for  employee's  bond. C.) 

natiouul,  crimes  by  officers  of V,jP> 

cases 1*33 

employee,  liability  same  as  on  other  fidelity  bonds 233 

di.i:;est   of   authorities i.'33 

table  of  cases  relativ'e  to 'Sil 

borrowing  to  cover  default '27'2 

bond  not  liable  for  special  deposit 273 

nor  for  funds  received  without  authority 273 

cashier,  as  agent  of 256 

ordinarily  his  ai  Is  binding  on  bank '2iHi 

BOND. 

(See  Employee.) 

(See  Corporate  Fidelity  Bond.) 

construction  of  corporate  fidelity 1 

as    surety    contract 4 

as   insurance  contract S 

as   indemnifying   contract 17 

illustrations 18-24 

summary 31 

construction  of  judicial 32 

construction    of   contract 32 

otiicial.  corporate  fidelity  as 141 

successive  fidelity. 

liability  where  default  in  more  than  one  term 13."> 

liability  limited  to  penalty  of  original  bond 13."» 

leading  case 13r. 

digest  of  authorities 137 

conflict 13S 

liability  where  original  bond  invalid 139 


INDEX.  291 

PAGE 

BOND,  Continued. 

successive 204 

digest  of  authorities 204 

official 200 

corporate  fidelity,  as  official 141 

surety  liable  as  upon  statutory 141. 144 

false  inducement  to  execute,  no  defense 142 

conflict 143 

limitations  in 248 

representations  and  warranties  in 33 

burden  of  proof  of 39 

fraud  in   procuring TO 

signature  to 210 

of  insurance  agent 241 

of  bank  employee 233 

BREACH. 

of  warranty 44-4G 

of  promissory  warranty 45 

*of  bond,  by  obligee's  failure  to  notify  surety  of  delinciuency 

of   principal It3 

of  contract,  knowledge  of 22.1 

BIRDEN   OF   PROOF. 
(See  Evidence.) 

prima  facie  proof 13 

of  representation  or  warranty  in  coriiorate  fidelity  contract,     .3!) 
leading   case 3!) 

CASES. 

(;S'ee  Digest  of  Ai;thouities.) 

CAUSES. 

( See  Removal  of  Causes.  ) 
CHANGE. 

of  employment. 

(See  Contract.) 

CHECKS. 

fraudulent  raising  of  by  employee 207 

to  be  observed  by  obligee 4.') 


2\)2  INDEX. 

I' AUK 

L'C>NS'li;i  (TIOX. 

uf  <ur|Kiniti'   fidelity  bonds 1 

as  surety  contract 4 

as  insuraiKo  contract '  8 

as    indcnuiifying    contract 17 

illustrations 18-24 

summary .'il 

of  representations  and  warranties  in 4U-18 

illustrations 48-75 

of  .iudiclal   bonds 3li 

of  contract  and  other  similar  bouds 32 

of  represeutations  and  warrauties 33 

reference  to  local  statutes  concerning 34 

judicial    attitude 35 

illustrations  of 48-75 

of  representations  and  warranties,  doubtful  as  former....     47 
court  views  entire  contract 47 

COXTRACT. 

croporate  tidelity,   construction   of 1 

as  surety -4 

as  insurance  policy 8 

as  indemnity 17 

illustrations 18-24 

summary 31 

bonds,  construction  of 32 

knowledge  of  breach  of -~'> 

signature  to   (See  Signatire  and  Principal) 210 

alteration  of 1"» 

effect  on  liability  of  surety 175 

risk  performing  duties  of  more  than  one  otiice 177 

change  in  duties  of  risk 178 

extension  of  charter  or  increase  of  capital  stock  of 

obligee 180 

alteration  of. 

change  in  partnership  of  risk 181 

change  in  partnership  of  obligee 1S2 

miscellaneous    illustrations 1S2 


INDEX.  293 

PAGE 

CORPORATE  FIDI:LITY  BOND. 

construetiou  of 1 

as  surety  contract 4 

as  insurance  contract S 

as  indemnifying  conti-act 17 

illustrations 18-24 

summary 31 

representations  and  warranties  in 33 

definitions  of 36-40 

rules  of  construction  of 40-48 

illustrations  of 48-75 

proof  of  breach  of 39 

signature  to 210 

limitations  in 248 

as  official  bond 141 

surety  liable  as  upon  statutory 141 

false  inducement  to  execute  no  defense 142 

conflict 143 

CORPORATION. 

authority  of  officer  of.   in  making  statements  as  part  of 

application  of  employee  for  bond 69 

private,  whether  fraud,  negligence  or  misstatement  by  one 

officer  will  release  sureties  of  another 91 

leading  case 116 

discussion 118 

digest  of  authorities 119-12.3 

public,  laches  of  officer  of 109 

knowledge  of  officer  of 228 

bound  by 228 

conflict 231 

CULPABLE  NEGLIGENCE. 

discussion  of 145 

elastic  term  in  insurance 145 

illustrations 145 

DEFAULT. 

(See  Immediatk  Notice  and  Proof  of  Loss.I 

Knowledge  of 225 

DEFINITIONS. 

of  representations  and  warranties 36-40 


-"••  I  INDEX. 

PAOE 

DIGKST  OF  AiriKHM'I'llOS 

construct  ion  of  coriionitc  lidclily  buiid 4-33 

roprest'iitations  inul  w.-irniiitii's 4.S-7n 

fraud  iu  procuring  bond 80-80 

failure  of  obligee  to  promptly  notify  surety  of  default  of 

rislc 03-103 

of  doalinss  with  or  indulgencf;  to  principal  by  obligee. .  103-10") 

laches  not  imputable  to  Government  of  U.  S 10i!-100 

laches  of  State,  municipal  or  other  public  corporations.  100-ll.j 

laches  of  officers  of  private  corporations 115-123 

fraud  or  dishonesty — larceny  or  embezzlement 127-133 

liability  where  bond  and  renewals 135-140 

corporate  fidelity  bond  as  oUicial  bond 141-144 

culpable  negligence 145-148 

where  surety,  without  denial  of  liability,  requires  fur- 
ther proofs,  information  for  arrest,  or  starts  prose- 
cution     149-151 

application  of  salvage 152-15«:> 

application  of  payments 1.57-101 

immediate  notice 1(>1-170 

proof  of  loss 171-174 

change  of  employment  or  alteration  of  contract 175-184 

faithful   performance  of  dutj- 185-190 

term  of  office 191-200 

term  of  public  officer 200-203 

successive  bonds 204-209 

signature  of  principal 211-223 

knowledge  of  default 225-22 1 

knowledge  of  officer  of  corporation 229-232 

bank  employee '  233-240 

bonds  of  insurance  agents 241-24. 

limitations 249-_oo 

cashier  as  agent  of  bank 2.t  i  -2o9 

evidence 2G0-26G 

burden  of  proof -'^^ 

general  scope  of  liability 2fi7-2(3 

removal  of  causes 2* » -284 

DISHONESTY. 

( See  Fbatjd.  ) 


INDEX.  295 

PAGE 
DUTY. 

faithful  performance  of 185 

embraces  competency,  skill  and  diligence  as  well  as 

integrity ISO 

miscellaneous  cases 187 

of  obligee 92 

rule  of  good  faitli  by.  c-ontinuous 97 

U.   S.  Government 106 

EMBEZZLEMENT. 
( See  Fraud.  ) 

compared  witli  larceny 124 

or  larceny,  meaning  of  terms 124 

construed  as  wrongful  misapplication  of  funds 133 

EMPLOYEE. 

employer's  statement  regarding  accounts  of 41 

illustration 43 

false  statements  by,  not  binding  on  insured,  unless  ratified,  48 

obligation  of,  in  application  to  repay  surety 210 

of  bank,  liability  same  as  on  other  fidelity  bond 233 

digest  of  authorities 233 

list  of  cases  relative  to 233 

fraudulent  raising  of  checks  by 207 

issuance  of  checks  by 2C9 

fraudulent  misapplication  of  funds  by 267 

balances  due  by  insurance  agent  as 268 

advancement  to,  by  employer 260.  270 

diversion  of  funds  by 270 

theft  by,  upon  being  discharged 270 

transactions  outside  territory  of 175,  270 

surety  of,   liable  for  loss  following  employee's  failuie  to 

cancel  fire  insurance  policy  as  directed 270 

defaults  of  cashier  appointed  to  assist 271 

individual    acts   of   cashier 272 

defaults  by,  before  givinc  of  bond 271 

borrowing  by,   to   cover   default 272 

bond  of,   to   sell    goods 272 

surety  of,  not  liable  for  advances 272 


2  KG  -  INDEX. 

PAGE 
K.MI'LOVKIO,  Continued. 

iiiisiippliciitioii  (tf  fiiiids  \>y  life  iiisiiriiiicc  iircsidoiit 272 

bond  of,  not  di.schiir^'cd  Ity  suit  ou  uolcs  for  snnio  funds.  .  27 

bond  of,  not  liable  for  special  deposit 27 

nor  for  money  received  without  authority   iT 

failure  of  to  ;H(tn]iit  foi'  funds  received  from  jM-edecessor.  .   27:i 

sii^nature  of 210 

defaulting  may  be  prosecuted  by  surety  on  subrogation. . . .   155 

.surety  not  liable  for  debts  contracted  by 209 

EMPLOYER. 

Statement  of,  regardinir  employee's  accounts 41 

illustration 43 

statement  by  public  officer  as 75 

authority  of  otficer  of  <  orii(»ratiini  to  make  statement  as..     69 
EMPLOYMENT. 

clian.ne  of.     ( fe'ee  Contkact.  ) 
duration  of.     (See  Trim  <>i  (  M  i  u  k.  t 
EXAMINATION. 

of  accounts  of  employee 42 

EXECUTION. 

of  contract 210 

EVIDENCE. 

relating  to  Hdelity  bonds 2<i0 

admissions  of  principal  and  records  kept  by  liim  usually 

admissible  and  binding  on  him 260 

digest  of  authorities 263 

burden  of  proof 265 

of  representation  or  warranty  in  corporate   fidelity 

contract ; 39 

l)rima  facie,  of  claim 13 

EXPENSES. 

obligation  of  principal  to  pay 210 

FATTIIFUL  PERFORMANCE  OF  DUTY. 

( See  Duty.  ) 
FALSE  REPRESENTATION. 

(See  Reprksent.mions  and  Warranties.) 

in  pi'ocuring  bond 76 

by  jniblic  officials 89 

by  in-ivate  corporations 91 


INDEX.  297 

PAGIC 

FEES. 

attorneys,  obligation  of  principal  to  pay 210 

FIDELITY. 

(See  Corporate  Fidelity  Bond.) 

FORFEITURES. 

law  is  averse  to 4() 

FRAUD. 

in  procuring  bond 70 

Government  or  other  sovereign  body SO 

private   corporations 91 

or  dishonesty 124 

FRAUDULENT. 

concealment  of  facts  in  applying  for  bond 70 

GOVERNMENT. 

frauds  by  officers  of,  in  procuring  bonds  for  other  officers.     89 
laches  not  imputable  to lOG 

IMMEDIATE  NOTICE. 

discussion  of 162 

what  is 162 

x-easonable  notice  sufficient 163 

digest  of  authorities 164 

notice  under  accident  policies 169 

requirement  of  notice  reasonable  and  imperative 170 

INDEMNITY. 

corporate  fidelity  bond,  as  bond  of 17 

illustrations 18-24 

INDULGENCE. 

by   obligee,   or   dealings   with   principal 93 

INFORMATION. 

for  arrest 149 

INSURANCE. 

( See  Agent  and  Employee.  ) 

agents,  bonds  of 241 

discussion 241 

digest  of  authorities 242 

table  of  cases 244 

JT'DICIAL  BONDS. 

construction  of 32 


-!).S  •  INDEX. 

k.\(>\vm;i»gI':. 

<>r  (Ic'linilt,  what  is 2L'."i 

oltligco    requirod    to    act    on    actual    kiKiwIcdfic,    nut    iDcro 

snsi)icion 22.", 

(litest  (»r  authorities 22r( 

of  uiil'avorahh'  facts  not  counectcd  with  eiui)loyiuent 227 

of  olllcor  of  corporation 228 

by  oblisee  of  defaults  not  communicated  to  surety uy, 

LACHES. 

hy  obligee,  discussion  of 92 

not  imitutable  to  U.  S.  Government 100 

digest  of  authorities 100 

nor  to  State,  or  other  public  corporation 109 

digest  of  authorities 109 

by  private  corporations,  Quere 115 

digest  of  authorities ll.^> 

LARCENY. 

( See  Fraud.  ) 

compared   with   embezzlement 124 

or  embezzlement  in  civil  case  construed  as  wrongful  mis- 
application of  funds 133 

LEADING  CASE. 

burden  of  proof 39 

false  warranty 45 

successive  fidelity  bonds 130 

fraudulent  representation 7S 

negligence  by  obligee 80 

effect  of  failure  of  obligee  to  communicate  to  surety  de- 
fault of  principal 98 

laches  or  fraud  of  one  officer  of  private  corporation   as 

affecting  sureties  of  others 110 

strict  construction  of  insurance  conti'act 0 

construction  against  insurer  in  case  of  ambiguities 13 

representations  and  warranties  in  insurance  contracts 39 

signature  of  principal 210 

laibility  of  surety  for  insurance  agent 241 

removal  of  causes  against  State  prohibition 283' 


ixDEx.  299 

PAGE 

LIABILITY. 

of.  surety,  where  he  requires  information  for  arrest,  further 

proofs  of  loss,  etc 149 

attachment  and  termination  of 191 

scope  of 267 

illustrative  authorities 267 

LIMITATIONS. 

provisions  relative  thereto  in  corporate  fidelity  bonds 248 

doctrine  of  Supreme  Court 248 

digest  of  authorities 249 

MISREPRESENTATION. 

in  procuring  bond 76 

NATIONAL   BANKS. 
(See  Bank.) 

crimes  by  officers  of 13S^ 

NEGLIGENCE. 

(See  Laches.) 

(See  Culpable  Negligence.) 

of  obligee 78.  92 

review  of  authorities 100 

NOTICE. 

(See  Immediate  Notice.) 
of  loss  ( See  Proof  of  Loss  ) 171 

OBLIGEE. 

indulgence  or  dealings  by 93 

laches   of,  genex-ally 78, 93 

digest  of  authorities lOCi 

OFFICE. 

term  of U51 

attachment  and  termination  of  liability V.n 

digest  of  authorities 191 

bonds  of  public  officers 200- 

OFFICER. 

(See  Corporation  . ) 

of  corporation,  knowledge  of  binding  on  corporation 22S 

conflict -"^l 

authority  of,  in  making  statements  as  part  of  appli- 
cation for  employee's  bond 69 


'MO 


INDEX. 


PAGE 

OFF  I  ('Kit,  Continued. 

public,  stiiteuK'iits  by.  in  i-cfcrciHc  to  Mpplication  of  other 

ofiicer 7.-, 

bonds  of 2(KJ 

OFFICIAL. 

successive,  bonds liOO 

corporate  fidelity  as ]41 

PAULY  CASE 13,  3  5,  10,  70,  72,  171,  22G,  230,  250,  25<J 

PAYMENTS. 

(See  Application.) 

application  of l.-,7 

in  course  of  business l.")7 

digest  of  authorities l.",7 

PREMIUM. 

life  company  not  required  to  tender  return  of,  when  de- 
fending for  breach  of  representation  or  warrnaty 7". 

Payment  of,  important  element  in  determining  whether 
cashier  is  agent  of  bank  in  making  employer's  state- 
ment therefor 259 

PRINCIPAL. 

Signature  of ." 210 

necessary  where  so  stipulated  in  contract 210 

leading  case 211 

recent  decisions 212 

reference  to  fidelity  bonds  generally 215 

rules  in  several  States 21(J 

miscellaneous  illustrations 21S 

bonds  other  than  fidelity — 

surety  liable 219 

surety  not  liable 221 

miscellaneous  observations 223 

admissions  of,  binding  on  surety 260 

obligation  of,  to  repay  surety 210 

surety  not  liable  for  debts  contracted  by 209 

l'K<)MisSORY    WARRANTY. 

(See  Repbesentation  anh  Warranty.) 

PROSECFTE. 

right  of  surety  to.  by  subrogation 155 


PAGE 

PKOOF. 

burden    of    (See  Evidence) 205 

of  loss,   requiriug   further 149 

discussion  of 171 

sufficiency  of 171 

digest  of  authorities 171 

strict,   of  larceny  or  embezzlement,   not   required   iu  civil 

cases ■ 126 

REMOVAL  OF  CAUSES. 

discussion  of 274-2S7 

from  State  to  Federal  Courts 274 

requisites 274 

discussion 275 

digest  of  authorities 277 

for  local  prejudice 278 

State  statutes  prohibiting 279 

review  of  authorities 279 

constitutionality  of  such  statutes 284 

is  cause  removable  where  Federal  question  involved?  286 

possible  solution  of  difficulty 287 

REPRESENTATIONS   AND  WARRANTIES. 

[See  Fraud  in  Pbocuring  Bond) 76 

discussion  of 33 

subject  of  conflict 34 

reference  to  local  statutes  relating  to 34 

judicial  attitude  regarding 35 

definitions  of 36-40 

distinction  between 36-40 

leading  case,   regarding 38 

rules  of  construction  of 40-48 

illustrations 48-75 

false  representation  of  immaterial  fact 40 

of  material  fact 41 

doubtful  statements  construed  as  representations 47 

court  views  entire  contract 47 

false  statements  by  risk   not   binding  on   insured,   unless 

ratified 48 

false  inducement  to  surety  to  e.xecute  corporate  fidelity  as 

official  bond 142 


o02  INDEX. 

PAGE 

Iti:i'i:i;si:N'l"ATI<)NS  AM>  WAUUANTIKS,  continued. 

ill  iusuraiK*^  iKjlicies,  list  of  ciiscs ~'> 

by  public  ollicers ~'> 

lite  iius.  company  not  requircnl  to  tender  return  of  pi-cniiuni.s 

when  defendiiif:  for  breach  of 7") 

SALVAGE. 

(See  Ai'i'LicATioN.) 
application  of !•>- 

di.iicst  of  authorities ir>li 

first  to  unsecured  loss 152 

discussion 15."» 

SIGNATURE. 

(/S't'c  Principal.  ) 

of  principal 210 

necessary  wliere  so  stipulated  in  contract 210 

leading  case 211 

recent  decisions 212 

reference  to  fidelity  bonds  generally 21."> 

rules  in  several  States 21<; 

miscellaneous  illustrations 218 

bonds  other  than  fidelity — surety  liable 210 

surety  not  liable 221 

miscellaneous  observations 223 

STATE. 

laches  by  officer  of 100 

digest  of  authorities 100 

conflict 115 

SI^BROGATION. 

right  to  prosecute  by 1  •">."! 

SUCCESSIVE.  BONDS. 

(/Sec  Successive  FroELiTY  Bonds.) 

discussion  of -<^ 

digest  of  authorities 204 

official  bonds 20i : 

SUrCESSIVK  FIDELITY  BONDS. 
(Sec  Successive  Bonds.) 
discussion   of 135-140 


INDEX.  303 

PAGE 

SUCCESSIVE  FIDELITY  BONDS,  Continued. 

liability  on,  where  default  in  more  than  one  term 135 

limited  to  penalty  of  original  bond 135 

leading   case 136 

digest  of  authorities ; 137 

.   conflict 138 

liability  where  original  bond  invalid 139 

SURETY. 

liability  of,  where  obligee  failed  to  notify  of  default 93 

liability  for  defaults,  after  knowledge  by  obligee  non-com- 
municated to  surety 93 

liability  of,  in  cases  of  indulgence  or  dealings  by  obligee. .  93 

in  cases  of  laches  or  negligence  by  obligee  generally,  93 

where  he  requires  information  for  arrest,  &c 149 

or  institutes  prosecution 149 

illustration 149 

not  liable  for  advances  to  employee  when  compensated  by 

commissions 272 

nor  for  debts  contracted  by  principal 269 

by  subrogation,  may  prosecute 155 

obligation  of  principal  to  repay 210 

TERM. 

( See  Office.  ) 

UNITED  STATES  GOVERNMENT. 

laches  not  imputable  to ini; 

WARRANTY. 

{See  Representation  and  Warranty.) 

false  of  immaterial  fact 44 

material  fact 45 

leading  case 45 

promissory 45 


UNIVERSITY  OF  CALIFORNIA    LlltRARY 

I. OS  A  limits 
This  book  is  1)1  i;  on  the  last  date  staiiiprcl  IkIoh. 


l)CT18  136l  /r 
MAY  1  0  1978 


Form  L9-Series  4939 


LAW  LIBRARY 

UNT/ERSITY  OF  CALIFORNIA 

LOS  ANG£I^:S 


Ub  auu  mcnm  nuv. 


AA    000  869  345    9 


